These days, even the smartest investors find it challenging to maximize their money and minimize taxes through personal savings. Now, thanks to the federal government’s new Tax Free Savings Account, announced in the 2008 budget, Canadians can look forward to keeping more of their hard-earned dollars – while paying zero tax on capital gains, dividends or interest earned in a TFSA.

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It has been a tough year for investors, as the fallout from the U.S. housing meltdown continues to hamper liquidity, reduce credit availability and cut earnings. The result has been a global economic slowdown, especially in the G7 countries, emanating from tightening credit terms – despite this year’s central bank easing. Unfortunately, it’s not over yet, and with the recent turmoil stemming from Fannie and Freddie, Lehman and AIG, it won’t likely turn the corner for at least another year. In this environment, recent surges in food and energy prices have led many to fear a 1970s-style period of stagflation. Fortunately, that’s unlikely, given reduced union power and labour’s inability to demand cost-of-living pay raises.

Prices have escalated at their fastest pace in decades, fuelled by surging commodities. Central banks still see inflation as a significant problem, because increased oil and food costs dampen discretionary spending and reduce corporate profitability, in turn boosting recession probability. Unexpectedly, thanks to rising inflation the Bank of Canada held rates steady this summer, while the European Central Bank actually raised rates, to help curb wage gains. Meanwhile, the credit crunch persists, and major economies are softening further. In recent weeks, commodity prices have come sharply off their highs, ratcheting down inflation expectations.

The recent spike in headline inflation is temporary, as commodities pull back with the slowing global economy. Eurozone, the U.K. and Japan contracted in Q2, and U.S. domestic demand posted another poor performance despite the tax rebates. In Canada, inflation accelerated to its highest rate in five years, with rising food and energy prices hitting home as the loonie no longer provides a buffer. While price pressure will likely persist for a few more months, inflation should undershoot the Bank of Canada’s latest forecast. But the Canadian economy has taken a turn for the worse, suffering from weak U.S. growth and an end to our housing boom. Home prices are now falling in what were previously the hottest markets, and construction is trending downward. Canadian growth will likely remain sluggish through year end, picking up only moderately in 2009.

The U.S. faces a consumer-led recession, its first in nearly two decades. Since the crisis erupted last year, the Federal Reserve has already cut the fed funds rate by 325 basis points, and funnelled hundreds of billions of dollars in liquidity to the financial sector, in an effort to ease credit conditions. The housing market is showing faint signs of a bottom, but financial institutions have booked further writedowns, with more losses likely over the next year due to the economic downturn. With other developed economies turning sharply weaker, the U.S. dollar has rebounded a bit in recent weeks.

A stronger greenback and a sluggish global economy should keep a lid on commodity prices over the coming year. The balance of 2008 will remain difficult for equities, but 2009 should be more upbeat, because equity markets tend to rally in anticipation of economic recovery.

The Bottom Line: Stagflation fears are overblown as a slowing global economy reduces commodity demand, while rising unemployment should keep wage gains subdued. As we move into 2009, look for inflation to come down, which should allow central banks to ease monetary conditions, setting the stage for a recovery later next year.

Sherry Cooper is global economic strategist and executive vice-president, BMO Financial Group, and chief economist of BMO Capital Markets.

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Another great reason to consolidate your investments

More than two out of three new jobs today require more than high school, and the prospect of paying for your child’s post-secondary education can be daunting. Consider this: in today’s dollars, you can expect to pay around $60,000 for a typical four-year degree. But experts predict that by the time your child is ready to head off to college or university, that number could easily reach six figures. One of the best ways to prepare for this expense is by investing in an RESP.

Profit from government grants and tax-sheltered growth

Whether you’ve already opened an RESP for your child or are still considering doing so, the advantages are clear. You benefit from tax-sheltered growth, flexibility and government grants, and when you withdraw the money for post-secondary education, it’s taxed in the beneficiary’s hands. And as a student, your child will pay little or no tax on the funds.

Manage your RESP portfolio yourself

You’ve already chosen to take charge of your own investment portfolio with BMO InvestorLine. Why let someone else manage your RESP? With RESPs coming soon to our diverse product line up, we’re making it even simpler for you to transfer your investments to support your children’s education. Thanks to our detailed RESP account tracking and robust RESP Corner, you’ll always have a clear picture of your finances, and you can manage them easily – all in one place.

Consolidation saves you money

Consolidating your investments can really add up. Clients with assets over $100,000, as well as 5 Star Program and Active Trader Program clients, can take advantage of our flat fee of just $9.95 per trade. To gain full control of your investment portfolio, it makes sense to consolidate your assets with
BMO InvestorLine.

Watch for more information on RESPs – including access to an RESP calculator, FAQs and articles. Sign in to your account at bmoinvestorline.com and go to the RESP Corner under Planning.

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Tax-Free Savings Accounts

The biggest news since the RRSP

These days, even the smartest investors find it challenging to maximize their money and minimize taxes through personal savings. Now, thanks to the federal government’s new Tax Free Savings Account, announced in the 2008 budget, Canadians can look forward to keeping more of their hard-earned dollars – while paying zero tax on capital gains, dividends or interest earned in a TFSA.

TFSAs represent the most significant tax break for individuals since the government introduced Registered Retirement Savings Plans over 50 years ago. Starting this January, Canadians can contribute to a TFSA and watch their savings grow, tax free.

While RRSPs are primarily geared towards retirement, TFSAs can add another layer to a retirement strategy – with no penalties for withdrawals – and offer far greater flexibility than other registered plans. This means investors can easily put money aside and save for future peace of mind, or dream big by using their TFSA to accumulate savings to start a small business, buy a new house, finance a renovation project, save for a new car, throw a wedding, or plan the trip of a lifetime. The possibilities are endless!

Features and Benefits

• Canadians over the age of majority can contribute up to $5,000 annually into a TFSA. The initial $5,000 limit beginning in 2009 is indexed to inflation, and the government will increase it periodically, in $500 increments. There is no lifetime contribution maximum – just the annual limit.
  
  
• Unlike RRSPs, TFSA contributions are not deductible for income tax purposes. However, all investment income – interest, dividends and capital gains – earned on a TFSA account accumulates tax free, even upon withdrawal.
  
  
• As with RRSPs, unused TFSA contribution room can be carried forward indefinitely. For example, if you only contribute $3,500 (versus $5,000) to your TFSA in 2009, you can contribute $6,500 in 2010 ($1,500 from 2009 plus $5,000 for 2010).
  
  
• You can withdraw money from a TFSA at any time, and for any purpose – tax free.
  
  
• Withdrawals made in the previous year (including account growth) will be added to your TFSA contribution room for the current year, and carried forward indefinitely.
  
  
• A TFSA is generally permitted to hold the same qualified investments as an RRSP, including stocks, fixed-income securities, mutual funds and GICs.
  
  
• Neither income earned by a TFSA nor withdrawals from it will affect your eligibility for federal income-tested benefits and credits (e.g., Old Age Security, the Child Tax Benefit, GST credit, Guaranteed Income Supplement).
  
  
• You can provide funds to your spouse or common-law partner to allow him or her to make a contribution to their TFSA (subject to his/her available TFSA contribution room). Income attribution rules don’t apply.
  
  
• Once enabling legislation is passed by the provinces and territories, TFSA assets may be transferred to the TFSA of a spouse or common-law partner on the death of the account holder.
  
  
• The transfer of existing non-registered investments into a TFSA is considered a deemed disposition at fair market value, so taxes are payable on any realized gains, but any realized losses will be denied.
  

You choose how you want to use the TFSA, but you need to weigh your options carefully. Since you can apply any number of investment vehicles to optimize the TFSA’s potential, it’s wise to assess your goals and investment objectives in order to make an informed decision about how it fits into your portfolio. The TFSA’s role in your financial strategy, relative to other government-sponsored savings plans, will depend on your age, taxable income and risk tolerance.

Note: BMO InvestorLine will offer TFSAs beginning January 2009. Visit bmoinvestorline.com to learn more about how TFSAs work.

If you’re looking for a powerful resource that may help you identify buy and sell opportunities, check out our new Technical Analysis feature.

We recently introduced Technical Analysis — a sophisticated method of analyzing stock price performance at bmoinvestorline.com. Using market statistics, such as past prices and volume, Technical Analysis allows you to identify price tendencies or patterns that may be used to anticipate the future direction of a stock’s performance. In turn, this may help you identify buy and sell opportunities.

Using key features like Daily Analysis, Advanced Charts and Technical Terms with simple illustrations, Technical Analysis helps you:

• Get a clearer picture of market action at a glance – Charts show how prices are moving (or not moving), when they are trending, and the strength of those trends. Volume, oscillators, and momentum data give you a clearer picture of market action.

• Easily identify patterns to predict price movements – Charts may help you find patterns that could be used to predict price changes.    

• Eliminate complex mathematical operations– Technical Analysis is less time consuming than fundamental analysis.

• Quickly identify momentum, volatility and trading patterns – Charts and indicators can provide you with significant information in just a few minutes, helping you spot trends and identify support and resistant levels.

For more information on Technical Analysis – including a tutorial, detailed instructions and examples – visit bmoinvestorline.com and access Technical Analysis under Research.

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Portfolio Rebalancing Keeps You on Track

Let the Portfolio Rebalancing tool help you bring your portfolio back to its original asset allocation.

If you haven’t already done so, complete the Asset Allocator and choose your  Investor Profile. Then use the Portfolio Rebalancing tool to view a side-by-side comparison of your current portfolio against your plan. You’ll clearly see how your asset mix has shifted, and the steps necessary to adjust or rebalance your portfolio to get it back on track.

Sign in to your account at bmoinvestorline.com, go to My Portfolio, and access the Portfolio Rebalancing tool under Portfolio Management.

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Fast. Simple. No Paper.

Enjoy the convenience of accessing your account statements online anytime, anywhere. Sign into your account at bmoinvestorline.com and edit your Account Profile in the Account Services section.

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A survey of Canadian households shows that investors have only 13% of their total wealth in non-Canadian holdings.* Conversely, many large pension plans are allocating more to their portfolios’ global content. For example, the Canada Pension Plan’s global equity portion has grown to 35%, according to the The Globe and Mail (Feb. 26, 2007). You decide how much global content may be right for you, to help you capitalize on opportunities and reach your investment objectives.

*Source: Investor Economics, Household Balance Sheet Report, 2007 edition

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