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Editors: Martin Rochwerg, Miller Thomson LLP;
David W. Chodikoff, Miller Thomson LLP;
Hellen Kerr, Thomson Reuters
Revisiting Sommerer v. The Queen
The Canadian Common Law and Tax
Treatment of an Austrian Private Foundation ..... 1
Allison's Brain .....................................................4
Path Dependency in Financial
Planning: Retirement Edition ..............................5
Tax Inversions: A Legitimate Means of
Tax Avoidance But, for How Long? ..................9
Proposed Changes to Charitable Gifts
by Will ................................................................ 10
The Thin Capitalization and Proposed
Back-to-Back Loan Rules .................................. 12
Joint Tenancy Has Its Own Pitfalls .....................17
Aboriginal Rights A Hidden Cost of
Investing in Resource Development in
Canada .............................................................. 18
Investing in Permanent Life Insurance .............. 19
Residency Tiebreaker Rules in Canadas
Income Tax Treaties: All is Not as it Seems ....... 21
Mitigating U.S. Tax exposure through
the Closer Connection Statement .....................23
Cases of Note ....................................................23
By Adam Butler, Mike Philbrick and Rodrigo Gordillo, Portfolio
Managers with Butler|Philbrick|Gordillo & Associates at
Dundee Goodman Private Wealth
And now the sequence of events in no particular orderDan
Imagine for a moment sitting at the kitchen table, steaming
coffee in hand. The sun is streaming in the windows, bacon is
popping in the pan, and Rover drops the paper at your feet. A
brilliant Saturday morning by any measure, but today is extra
special. Now youre retired!
When you open the paper to the front page you notice that
something is strange. First, the pictures are moving as though
there is a movie embedded in the page instead of a picture. The
text is in a strange font, and is so clear that it almost jumps
from page to eye. When you start to scan the rst article, you
are startled to discover that a womans voice seems to be
reading the words directly into your mind.
Your eyes dart to the top of the page, searching for the
publishing date of the paper: August 1, 2045. Your gut falls,
pulse is pounding; deep breath, calm yourself. A few minutes
later, coffee and bacon forgotten, you are ipping urgently
through the paper maybe it will disappear just as quickly as
it appeared!
Strange names, strange places, strange devices; what wonders!
Then you are in the business section. Numbers scroll across the
top of the paper: every major market is listed and some new
ones, along with their current prices. A bell goes off in your
head, and a smile paints its way across your face.
You work the math. Youre 63 years old today. Your retirement
plan was engineered to last you and your spouse 32 years until
you turn 95 in the year 2045. How fortuitous!
You scan the business pages, but cant nd any individual stock
listings, just closing values for major markets and asset classes.
Quickly, you compare the prices listed for indexes in the paper
to the most recent closing prices until you nd the market with
the best returns over the next 32 years.
You discover that the best market will deliver returns of 8%
per year. Retirement Nirvana is just a few clicks away with your
trusty Excel spreadsheet. No more anxiety, no more sleepless
nights. Youre set.
Or are you?
While you now have information about average returns for the
best market over the next 32 years, you have no idea what path
that market will take to get there. In your minds eye, it looks
like the trajectory in Chart 1; a beautiful arcing growth curve
from point A today to point B 32 years from now.
Chart 1. The retirement curve in your minds eye
But in reality, the paths that the index might take to achieve
that level are limitless. For example, the index might surge in
the rst few years and then move sideways for the last couple of
decades, like the red line in Chart 2. Or it might move sideways
for the rst three decades, and deliver all the returns in the
nal two years, like the green line.
Chart 2. Two alternate futures
I know what youre thinking: Why does it matter in what
sequence the returns are generated if we know exactly where
the index will end up? Why do I care if returns come early or
late, or are spread evenly through time?
These are great questions. Indeed, if we were to invest a lump
sum in the index today and leave it there for 32 years it would
2 3
not matter at least mathematically which path the index
travelled to get from A to B.
Unfortunately, most retirees arent in that situation. Rather,
most people expect to draw a steady income from their
portfolio, withdrawing monthly, quarterly or annually an
amount that keeps them in a certain lifestyle, adjusted each
year for ination. As we will see, this subtle change in objective
can have a profound impact on nancial outcomes.

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Lets zoom in for a moment on Nick and Nancy, both 63.
They are about to embark on the great retirement adventure.
Through sacrice, wisdom, perseverance and some luck

the couple has accumulated $3,000,000 in savings over Nicks
almost four decades as a corporate lawyer. Nancy is pretty good
with a spreadsheet so, with the help of their accountant, she
created one to determine how much pre-tax income they can
draw each year from their combined nest egg. Their analysis
yielded the results depicted in Chart 3.
The red bars in Chart 3 represent the income that Nick and
Nancy expect to draw each year from their portfolio, adjusted
for ination. You can see that in the year after retirement
they expect to draw about $180,000, and this amount scales
by 3% per year, to account for expected ination. The blue
line describes the evolution of Nick and Nancys wealth after
accounting for investment growth at 8%, and their annual
withdrawals. Note that their total wealth seems to peak at
around age 75 near $3.5 million before tapering off aggressively
toward their estimated age of mortality: 95.
Chart 3. Example retirement schedule from age 63 through 95
To summarize:
Nicks current age: 63
Retirement savings: $3 million
Modeled sustainable income: $180,000
So, from our future newspaper Nick and Nancy know that they
are going to invest in a portfolio that delivers 8% per year, on
average, over their 32-year retirement horizon. What they dont
know is the sequence in which those returns will materialize.
In the next section we will demonstrate how this seemingly
benign missing piece to the puzzle will decide Nick and Nancys
retirement fate.
For the sake of illustration, lets assume that the best index
over Nick and Nancys investment horizon is the Dow Jones
Industrial Average. Nick and Nancy condently withdraw an
income each month to fulll their lifestyle expectations, and all
of their money is invested in this index.
Lets also assume that the Dow delivers exactly the same
returns over the next 32 years that it delivered over the years
1966 through 1997. This period was chosen because the returns
to the Dow over the period were exactly 8% (or near enough
for government work), and because it captured a long sideways
market in the 1970s as well as a long powerful bull market
from 1981 through the late 1990s. Chart 4. plots the price
performance of the Dow over this period.
Chart 4. Dow Jones Industrial Average Index (1966 1997)
Data source: Bloomberg
Again, note that the average return to the Dow over this period
is 8% per year. However, if you look closely you will see that
the returns are not evenly spaced over time. Rather, from 1966
through 1982 there are essentially no returns, as the index
began the period at 1000 and ended the period at the same
level. Then, from 1982 through 1997 the Dow grew at over 15%
per year taking the index from 1000 to about 8000. Charts 5
and 6 zoom in to provide a better perspective on these two very
different market regimes.
Chart 5. Dow Jones Industrial Average Index (1966 1981)
Data source: Bloomberg
Chart 6. Dow Jones Industrial Average Index (1982 1997)
Data source: Bloomberg
In our rst instance, lets take the straightforward example
where Nick and Nancy experience exactly the same returns, in
exactly the same order, as the Dow index delivered over the 32
years from 1966 to 1997. Remember, in the early years Nancy
and Nicks portfolio is large relative to the amount of their
annual withdrawals, while in the back half of their retirement
horizon, after theyve spent many years drawing down income,
the portfolio is relative small. Obviously, the portfolio is more
vulnerable to poor returns when the portfolio is large than it is
when the portfolio is small.
In this example where the markets play out as they actually did
historically, market growth would materialize in a manner that
somewhat resembles the green line in Chart 2 above: sideways
early on with a late surge. Chart 7 shows the trajectory of their
retirement wealth given this market return trajectory, including
withdrawals and growth.
Chart 7. Retirement wealth trajectory: weak early returns and
strong late returns
Data source: Bloomberg
Remember, Nick and Nancy knew for certain that they would
achieve 8%average compoundedreturns over the full duration
of their retirement horizon. However, in this rst example,
where the poor returns come early in the retirement horizon,
the couple is completely broke over 15 years before their
expected age of mortality. That is, Nick and Nancy must endure
their remaining 5, 10 or 15 years in retirement on CPP (social
security) and old age social subsidies alone. A pretty dire
For our second example, we will mix things up. Rather than
experiencing the long, volatile sideways market from 1966 to
1981 rst, followed by the strongly surging market from 1982
to 1997 later, we will reverse the order. In this case, imagine
a situation where Nick and Nancy experience the long bull
market from 1982 to 1997 in the early part of their retirement
period when their nest egg is very large, and then experience
the 16 years of poor sideways markets in the latter half. Chart
8 shows Nicks and Nancys retirement trajectory under these
new assumptions.

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Chart 8. Retirement wealth trajectory: weak early returns and
strong late returns
Data source: Bloomberg
Note how this chart looks much more like Chart 3, which was
the retirement model that Nancy created when she analyzed
their prospective retirement trajectory. In this example, Nick
and Nancy are able to withdraw their desired income each year,
adjusted for ination, and still end up with over $4 million in
terminal wealth. Now we see why Albert Einstein allegedly
claimed that compound growth is the most powerful force in
the universe.
It is critical to remember that the Dow Jones Industrial Average
delivered average returns of 8% per year in both examples
above. With no cash ows going in or out of the portfolio,
the order of returns is completely inconsequential. It doesnt
matter whether returns come early or late; the Dow still ends in
exactly the same spot.
However, when we introduce cash ows into the equation,
things change dramatically. We saw that, with exactly the same
withdrawals, and exactly the same long-term average market
returns, Nick and Nancy ended up in two dramatically different
situations. On one hand they died with over $4 million in wealth
for heirs, charity or other valued causes. On the other hand they
were at broke at age 79, fully 16 years earlier than expected.
So what matters most to Nick and Nancy, the average return
from the market, or the average growth of their portfolio?
The average rate of return on a series of cash ows is referred
to as the Internal Rate of Return. It is also referred to as the
dollar weighted rate of return. We refer to the average dollar
weighted rate of return that a person receives on his personal
portfolio as his Individual Rate of Return, and it is theonlyrate
of return that should matter to investors who are either saving
money, or withdrawing money from their portfolio over time.
Table 1. compares the average rate of return on the Dow
Jones to the Individual Rates of Return that Nick and Nancy
experienced in their portfolios in the two examples above. Note
that the IRR from the model is less than 8% due to the way
dollar weighted returns are calculated over time in contrast to
the 8% arithmetic return of the index.
Table 1. Comparing Individual Rates of Return (IRR%)
Model 7.37%
Good returns come early 8.36%
Good returns come late -2.41%
Chart 9. Early returns versus late returns
Table 1 clearly shows that an investor with the exact same
savings and the exact same average market return can
experience a +10% difference to actual realized portfolio
growth, or Individual Rate of Return, simply due to luck. An
investor who is lucky enough to experience strong market
growth in the front half of their retirement horizon may
experience double, triple, or better growth than an investor
who is unlucky enough to have most of his strong returns come
in his later retirement years. In the case of Nick and Nancy, a
weak sequence of returns resulted in total depletion of their
wealth after 16 years of retirement, while a strong sequence
resulted in a $4 million legacy.
Nick and Nancy discovered that it is not enough to know
the long-term average returns that they can expect from
their investment portfolio. It is also important to account
for potentially adverse sequences of returns. For savers, it is
problematic to invest in a portfolio with the potential to deliver
high returns in early periods followed by low returns in later
periods. For retirees (and endowments and pensions) in a net
withdrawal situation, sequence of returns is equally important.
of sideways to set up for a long growth market a decade in our
Adam Butler, Mike Philbrick and Rodrigo Gordillo are Portfolio
Managers with Butler|Philbrick|Gordillo & Associates at
Dundee Goodman Private Wealth in Toronto, Canada.
Adam, Mike and Rodrigo can be found at
However, the situation is reversed, such that investors in
withdrawal will be adversely affected if returns cluster later in
the investment period, with lower near-term returns.
For investors in traditional portfolios this sensitivity to the
sequence of returns can be seriously problematic. Thats
because both stocks and bonds are prone to periods of low,
volatile returns that last many years or even decades.
The following chart shows the long-term returns to the Dow
Jones Industrial Average back to 1998. Note that periods of
strong returns coloured green in the chart have lasted
between 5 and 17 years, and delivered cumulative returns
ranging from 150% to 1000%. These green periods of long-term
growth are invariably followed by red periods of low or negative
returns that have lasted from 17 to 25 years historically, and
delivered cumulative returns between -4% and 12% over their
entire duration.
Chart 10. Long term Dow with secular bull and bear markets
Source: Guggenheim Investments
Note that we are currently about 13 years into the most recent
red sideways period. The question is, are we near the middle of
the sideways period, or did we turn the corner in 2008, setting
up for a new long-term growth cycle? (See our articleValuation
Based Equity Market Forecast December 2013 Update at for answer to these questions).
The answer has profound implications for investors. Are we
setting up for a decade of strong returns right now, which
would prove to be a boon for recent retirees but unfortunate
for young savers? Or will we experience another 5 or 10 years