By Alfred Lee, CFA, Investment Strategist, BMO ETFs

Despite the Canadian dollar pulling back after hitting "parity," it has seen an impressive run over the course of the last 15-months. As such, currency has become a topical issue of late. The Loonie bottomed against the greenback at US $0.7685 on March 9, 2009, coinciding with the stock market bottom in many developed markets. From this point, the Canadian dollar rallied 26.4% and 31.5% against its U.S. and European counterparts respectively. This has caused a major headwind for international investments and has even turned otherwise positive returns to negative in some cases.

One of life's greatest pleasures is spending time at the cottage with family and friends. Many Canadians cherish memories of endless summer days, barbecues and swimming at the lake. Indeed, cottage ownership is one of the rewards of living well.

Many parents want to pass on the family cottage to their children, as a source of enjoyment for generations to come. But that's often easier said than done. In the eyes of the Canada Revenue Agency, bequeathing a cottage from one generation to the next is treated as a purchase/sale transaction, and capital gains taxes can pose a major hurdle.

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If you're looking for a powerful resource that may help you identify buy and sell opportunities, check out the Technical Analysis tool.

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By Alfred Lee, CFA, Investment Strategist, BMO ETFs

Despite the Canadian dollar pulling back after hitting "parity," it has seen an impressive run over the course of the last 15-months. As such, currency has become a topical issue of late. The Loonie bottomed against the greenback at US $0.7685 on March 9, 2009, coinciding with the stock market bottom in many developed markets. From this point, the Canadian dollar rallied 26.4% and 31.5% against its U.S. and European counterparts respectively. This has caused a major headwind for international investments and has even turned otherwise positive returns to negative in some cases.

Currency volatility has increased significantly in the last several years and may very well remain elevated for the foreseeable future. Despite the Canadian dollar experiencing a significant run since its 2009 low, investors may want to continue hedging their currency exposure as a number of push-pull factors on currencies may be in play.

                    Source: Bloomberg, BMO ETFs

                    Source: Bloomberg, BMO ETFs

The following factors will push the Canadian dollar higher:

• Demand for commodities: As economic conditions are improving in parts of the world, further upward pressure is placed on the currencies of commodity exporting countries. As the global economy moves back towards expansion, the use of commodities will likely increase, with the need to buy currencies of the countries supplying those commodities (such as the Canadian dollar in order to buy resources such as oil and copper).
• The lack of fundamentally sound currencies: With credit rating agency Standard & Poor's recently downgrading the government debt of Greece and Spain, we may see similar downgrades made to other European Union (EU) members, spelling further weakness for the Euro. The U.S. dollar could also see problems, as the U.S. remains the world's largest debtor nation with a lack of an export industry to help shore up its balance sheet. Japan not only faces an aging demographic, but also has a debt to annual gross domestic product (GDP) ratio that exceeds that of Greece and Spain. Due to this, Japan may face a credit rating downgrade on its sovereign debt, which is never good for a currency. Finally, Fitch Rating agency recently described the U.K.'s fiscal challenges as "formidable." In contrast, Canada is home to the most sound banking system in the world.
• Increasing interest rate differentials: Economies around the world are at different stages of recovery, some being further along. As a result, some central banks may be more inclined to raise interest rates while others may be content in holding lending rates at record lows. In mid-April, U.S. Federal Reserve Chairman, Ben Bernanke assured congress that near-zero interest rates were here to stay. On the other hand, Canada, which has experienced a healthy recovery from the financial crisis, has already seen its central bank raise rates in June. In addition to Canada, we have already seen the central banks of Australia, Norway and India raise rates. Since higher interest rates tend to attract fund flows, the currencies of nations with higher relative interest rates tend to rise, all things remaining equal. With the fundamental strength of the Canadian economy relative to others, this could place further upward pressure on the Loonie.

The following factors will pull the Canadian dollar lower:

• Central bank intervention: Unfortunately, an appreciating currency is not particularly good for Canada, as our economy is heavily dependent on exports. This is especially true if the rate of ascension is too rapid for local businesses to adapt. As a result, the central bank will at times intervene to protect its export industry.
• Negative headlines: Given the financial crisis in 2008 and this year's sovereign debt concerns, the market remains sensitive to news that may lead to another bear market. The Canadian dollar tends to do well when the appetite for risk is rising, while its U.S. and Japanese counterparts tend to do well when risk-taking abates.

The above mentioned factors will act as on-going push-pull forces, which will lead to increased exchange rate movements. However, a number of other factors will further amplify the volatility between currencies in the coming years.

• Revised forecasts of economists: With many economists forecasting near depression levels heading into 2009, this allowed for ample opportunities for positive surprises. This was a big reason why we witnessed a strong bull-run last year, as low expectations were easy to exceed. However, economists have now readjusted their forecasts to reflect more realistic levels in 2010 and beyond. Now, earnings and economic data can come in above or below expectations, which will cause commodities to be volatile and henceforth, the value of "commodity dollars" to follow suit.
• Carry-trades: With the U.S. and Japan signalling the intention to keep interest rates low, this increases the likelihood that their currencies will continue to serve as funding currencies. In this particular trade, investors borrow in low cost U.S. dollar (or Japanese yen) to fund investments in riskier but higher yielding assets. Where the carry trade involves foreign assets, it essentially requires the investor to short the greenback (or yen) by borrowing in U.S. dollars (or yen) and long the foreign currency of the country where the asset is traded. However, when markets sell-off, investors who have initiated these carry trade positions may receive a margin call and be forced to liquidate their positions, paying back the U.S. dollar (or Japanese yen) denominated loans. This trade will therefore magnify the imbalance between currencies perceived as safe-havens and those currencies which are perceived to be "riskier."

Currency hedged ETFs are a good solution for investors who want efficient access to foreign markets without the added volatility due to currency fluctuations and without the added complexities of hedging themselves. Despite the relative strength of the Canadian dollar, all of the aforementioned reasons should keep the swings between currencies volatile. As such, investors may want to consider currency-hedged products. By doing so, they will be able to continue accessing the growth and diversity of non-Canadian markets without the added volatility attributed to currency.

BMO ETFs have several currency-hedged ETFs that provide investors with access to a variety of non-Canadian mandates.

All prices as of close on June 11, 2010 unless otherwise indicated.

For a full list of BMO ETF line up, visit bmo.com/etfs. For a list of ETFs offered at BMO InvestorLine, sign in to your account and visit the ETF Centre under Research.

Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc., does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual's circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.
BMO ETFs are managed by BMO Asset Management Inc. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.
© Andrew Judd/Masterfile

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One of life's greatest pleasures is spending time at the cottage with family and friends. Many Canadians cherish memories of endless summer days, barbecues and swimming at the lake. Indeed, cottage ownership is one of the rewards of living well.

Many parents want to pass on the family cottage to their children, as a source of enjoyment for generations to come. But that's often easier said than done. In the eyes of the Canada Revenue Agency, bequeathing a cottage from one generation to the next is treated as a purchase/sale transaction, and capital gains taxes can pose a major hurdle.

For most families, the thought of losing the cottage is unbearable. Yet if there isn't enough ready cash to pay the taxes owing, CRA may require that the cottage, or other assets from the estate, be liquidated. Let's take a closer look at this problem and explore some possible solutions.

Understanding capital gains
Some time ago, there was no such thing as a tax on capital gains in Canada. Today, however, capital gains often represent the biggest obstacle in cottage succession planning. The longer you've owned a cottage, the greater its potential value, and in most cases this means a greater tax burden. The capital gain on a cottage is calculated as follows:

Capital gain = fair market value (FMV) - adjusted cost base (ACB).
Fair market value. The property's FMV is simply what it's worth in today's market. You can consult a realtor or other accredited specialist to obtain an accurate estimate of the property value.
Adjusted cost base. The ACB is the price paid for the property, plus the cost of any improvements (for example, a new roof, a shed, paint, a new dock, etc.) since the property was acquired.
The inclusion rate for capital gains is 50 percent, so half of the total capital gain is taxable.

Case study
Michael and Kathy purchased their waterfront cottage in 1975, for $40,000. They now want to plan for the eventual transfer of the cottage to their children. Like most properties in the Muskoka region, their cottage has appreciated considerably: according to a recent appraisal, it's worth $525,000. Michael and Kathy estimate they've spent about $60,000 in upgrades and improvements, for which they've kept receipts.

If the cottage were sold today, the capital gain would be calculated as follows:
   Capital gain = FMV - ACB
   = $525,000 - ($40,000 + $60,000)
   = $525,000 - $100,000
   = $425,000
The taxable portion of this capital gain is $212,500. At a 46 percent marginal tax rate, this results in a tax bill of around $97,750, a liability that presents an obvious challenge to fund.

Managing capital gains taxes
Since the primary objective is to keep the cottage in the family, developing a sound plan for managing taxes is key. Common strategies include:

• Principal residence exemption. If your cottage has appreciated more than your home has, it may make sense to designate the cottage as your principal residence. Doing so allows you to avoid taxes completely by utilizing the principal residence exemption. This strategy has one significant pitfall: if you use the principal residence exemption to shelter the gain on your cottage, it will no longer be available for that purpose on your house.
• Transfer the cottage to your children now. Even if you transfer the property as a gift, the taxes owing will be calculated according to FMV rules. While you have several ways to transfer the cottage as a gift, one favourable method is to use the capital gains reserve, which allows the taxes owing on the gain to be spread over up to five years. You can accomplish this via a promissory note, which is eventually forgiven in the will. Since no money ever changes hands, the capital gains reserve can be used to help manage the taxes owing.
• Bequeath the cottage and use life insurance. If you choose to leave your cottage to your children in your will, CRA will still consider it sold in the event of your death, and you or your estate will ultimately be responsible for any taxes owing. Life insurance is often the most cost-effective way to ensure sufficient funds are available to pay any taxes owing on your death. Life insurance proceeds are paid out entirely tax free, and the funds will become available upon your death - precisely when the tax bill arrives. A common approach is to have the children pay the insurance premiums, as they will be the ones who inherit the property.

Bottom line
Cottage succession planning represents a major concern for many families. There is no right or wrong strategy, but depending on your personal situation, one may be more favourable than another. You should always consult a professional, such as a qualified tax advisor or estate planning specialist, before taking any specific course of action. This will allow you to ensure many years of happy times to come for your family.

The comments included in the publication are not intended to be a definitive analysis of tax law. The comments contained herein are general in nature and professional advice regarding an individual's particular tax position should be obtained in respect of any person's specific circumstances.

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If you're looking for a powerful resource that may help you identify buy and sell opportunities, check out the Technical Analysis tool.

Technical Analysis is a sophisticated method of analyzing stock price performance. 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 detailed instructions and examples, sign in to your account and access Technical Analysis under Quotes and Tools.

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If you're thinking about diversifying your portfolio this summer, visit our ETF Centre where you can take advantage of over 900 ETFs, learn about their unique features and how to invest with them. You may also qualify to earn 20 FREE ETF trades!

To learn more, sign in and visit the ETF Centre in the Research section.

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Go paperless. Switch to eStatements and help contribute to a cleaner and greener environment. And now until June 30th, 2010 when you switch to eStatements, we'll donate $5 to Evergreen*.

With eStatements, you can:

• Review your statements online the moment they're ready
• Access and print statements - anytime, anywhere
• Reduce your paper use

And now, you'll be notified via email and in MyLink^® when your eStatement is ready.

To switch to eStatements, sign in to your account, visit eServices and edit your eStatements preference.

Make the switch and make a difference.

Evergreen is a national charity that makes cities more liveable. To learn more, visit Evergreen.

*Offer ends June 30th, 2010.

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In December 2008, BMO Financial Group became the first and only major Canadian bank to offer registered disability savings plans. This plan helps parents and others save for the long-term financial security of a person with severe or prolonged disabilities.

• Anyone can contribute to an RDSP
• The lifetime contribution limit is $200,000 per beneficiary, with no annual limit
• Contributions may qualify for payments from the Canada Disability Savings Grant (CDSG)* program, up to a lifetime maximum of $70,000 per beneficiary
• Lower-income beneficiaries and families may qualify for payments from the Canada Disability Savings Bond (CDSB)* program, up to a lifetime maximum of $20,000, without having to contribute to an RDSP
• Growth on investments within the plan is tax deferred
• When funds are withdrawn, the CDSG, CDSB and any investment income are taxed to the beneficiary, who likely has a much lower tax rate than parents or other contributors

* Eligibility ends December 31st in the year the beneficiary turns 49. Both the CDSG and the CDSB are contributed by the Government of Canada and paid directly to the plan on behalf of the beneficiary.

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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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