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The Wise Investor

Resources Getting Started The Wise Investor Online Investing Glossary Book Centre globefund.com Alert Table of Contents Put your financial adviser on a leash February 11, 2000 100% Foreign content for your RSP December 22, 1999 Tax Loss Selling or Dealing With Your Mistakes November 26, 1999 Life Stages of your RRSPs November 12, 1999 Just give me boring (but great) rates of return November 3, 1999 De-mystifying Demutualization - part Two October 25, 1999 De-mystifying Demutualization - part One October 19, 1999 Seg funds for the simple minded September 14, 1999 The interest rate game Part 2 August 12, 1999 The interest rate game Part 1 July 30, 1999 Choosing funds: Five for the long run July 14, 1999 New Funds: To buy or not to buy July 2, 1999 Making sense of momentum investing June 18, 1999 Rating the fund managers June 4, 1999 Resource recovery hinges on supply and demand April 30, 1999 Tech funds draw strength from favourable trends March 24, 1999 Withdrawing from your RRSP March 9, 1999 The economic implications of the euro - An interview with Ranga Chand February 12, 1999 Underperforming small-cap funds have strong upside potential January 29, 1999 How to pick a winning equity fund portfolio January 15, 1999 View the Weekly Insight archive

De-mystifying Demutualization - Part Two ANJALI KAPOOR, Freelance Journalist Monday, October 25, 1999 The retail mutual fund market has not been friendly to Canadian securities this year. Canadians poured more than $4 billion into foreign markets in July at a time when foreigner investors put back $2.3 billion into Canadian stocks and bonds1. However, this lack of domestic interest has ramifications outside of the mutual fund industry. One could make the argument that with the ongoing demutualization of Canadian life insurance companies, smaller, individual shareholders may be more likely to cash-in their ownership rights. Non-Canadian eligible policyholders may also be more apt to receive cash or sell the shares they receive. Both of these factors could be a major benefit to large institutional investors (especially passive/indexing investors who will view these companies as "must own" stocks) and other long-term investors. The immensity of the life insurance companies in terms of market capitalization and index inclusion is enormous. For example, if all of the publicly announced demutualizations come to fruition, the market capitalizations of Manulife and Sun Life could be comparable to the top 15 companies in Canada - right behind the banks, Nortel and Seagram. The four life insurance companies combined could represent market capitalizations in the range from $25 to $30 billion. As mutual funds, pension plans, and major institutions consider adding these stocks to their portfolios, the question of what they must sell arises. The result may have market-wide implications as investors re-balance their portfolios to reflect these new investment opportunities. Although new to Canada this year, demutualization has occurred successfully in other markets around the world. In the United Kingdom, demutualization of the country's three major insurance companies in 1997 represented over 2.5% of the UK's total GDP - and boosted consumer confidence2. In Australia, demutualization of the Australian Mutual Provident Society (AMP) resulted in a float of U.S.$10.6 billion that was estimated to boost the country's economy by 0.5% in 19983. In both cases, subsequent economic activity from increased consumer confidence and increased consumer spending surpassed the economic impact of proportional tax cuts. The United States also provides an interesting comparison in terms of using the relative value of the U.S. life insurance companies to determine where life insurance stocks might trade in Canada if demutualization occurs. This landscape will continue to change with large U.S. insurers Metropolitan Life Insurance Company and Prudential expected to demutualize in 2000. 1 Globe & Mail, September 24, 1999, Guy Dixon 2 Financial Times Ltd., April 2, 1997, Stephen Lewis, Chief Economist, Momentum Derivatives 3 Reuters News Service, September 1, 1998, Victoria Thieberger TAX TIPS Commonly-asked questions & answers Q: What are the tax consequences of cash and shares demutualization options for Canadian policyholders? A: There are corresponding tax consequences for each option. Cash - When an eligible policyholder receives the cash payment, the amount will generally be considered a dividend equal to the amount of cash received. This dividend will be included in computing the policyholder's income in the year it is received and will generally be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received from Canadian corporations. Shares - There are no immediate tax consequences if an eligible policyholder receives common shares. However, when the shares are sold, capital gains would normally be incurred. Since the cost of the shares is nil, the full proceeds of the sale (excluding costs of disposition) would be taxable as a capital gain in the year the shares are sold. Q: Are there additional tax consequences to demutualization? A: Yes. In addition to the wealth effect, there are other consequences to be considered by eligible policyholders who are seniors. The basic old age security pension will be reduced when other income reaches $52,215. The clawback is $0.15 for every $1 over that amount. So if the cash from demutualization increases the other income above that level, the old age security pension will be reduced by the clawback. For low-income seniors who receive demutualization benefits in the form of cash, the guaranteed income supplement will be reduced by $0.50 for every $1 of other income earned, excluding amounts received from the old age security pension. Due to these and other tax consequences, seniors may be interested to find out how their government benefits will be affected by demutualization. Source: Tracy Lemay, National Post, June 5, 1999 By, Anjali Kapoor, Freelance Journalist working with Elliott and Page This is part two of a two part story, to see part one click here

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