From Gross to Net at Alliance Data Systems

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Margins matter. The more Alliance Data Systems (NYSE: ADS) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Alliance Data Systems' competitive position could be.

Here's the current margin snapshot for Alliance Data Systems and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Alliance Data Systems

31.9%

22.1%

7.6%

 Western Union (NYSE: WU)

42.8%

24.6%

16.2%

 Total System Services (NYSE: TSS)

49.0%

20.1%

12.6%

 Fidelity National Information Services (NYSE: FIS)

27.8%

14.4%

4.2%

Source: Capital IQ, a division of Standard & Poor's. TTM

Is Synaptics a Cash Machine?

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Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That brings us to Synaptics (Nasdaq: SYNA), whose recent revenue and earnings are plotted below.

You've Got to Be Kidding, Boeing

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Another day, another Boeing (NYSE: BA) delay. Just hours after Bloomberg warned that the Chicago planemaker was mulling another delay in production of its revamped 747 superjumbo jet yesterday, Boeing woke up bright and early this morning and confirmed it.

Seems the company needs to redesign a wobbly "inboard aileron actuator" on the new 747-8, realign the plane's main wheel well, and make literally "dozens" more minor fixes to the plane. Boeing's also testing software to help fix a vibration problem encountered in some early test flights. Together, the fixes and upgrades will postpone delivery on the plane by six months, pushing the monster plane well past the two-years-overdue mark and keeping customers grounded well into mid-2011.

Sitting alongside 'em on the tarmac will be key 747-8 parts suppliers General Electric (NYSE: GE), Spirit AeroSystems (NYSE: SPR) -- which could really use the 747 work, seeing as how GE's "Technology Instrstructure" segment is seeing annual sales declines and Spirit's last quarter was roughly flat year-over year -- and Honeywell (NYSE: HON), less hard up but still struggling with single-digit growth.

Better luck next time
Well, at least it's not the 787 this time. That one's already more than two years overdue. But while we're thanking heaven for small blessings, let's not let Boeing off the hook for announcing yet another delay to a program only slightly lower-profile than its flagship Nightmare-liner.

I mean, I know that building planes is no easy task. Archrival Airbus has certainly had its share of difficulties getting both the A380 airliner and A400M military transport off the ground. Embraer (NYSE: ERJ) encountered turbulence putting its Embraer 190 and Embraer 195 lines in motion. China, Japan, and Russia are all bound to face manifold trials and tribulations as they attempt bring their own planes to market over the next few years. Obviously, Boeing was bound to encounter problems of its own in its effort to bring these groundbreaking new planes to market.

What I cannot for the life of me fathom, is why Boeing continues to persist in promising to deliver these planes on dates certain, and dates certainly overoptimistic -- disappointing its shareholders at every turn.

Remember, Boeing: The idea is to under-promise and over-deliver. Not the other way around.

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EMBRAER is a Motley Fool Stock Advisor recommendation and Spirit AeroSystems Holdings is a Motley Fool Hidden Gems pick, but Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

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How Garmin Stacks Up

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I believe in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: Garmin (Nasdaq: GRMN). Is the leading maker of global positioning systems (GPS) the real thing? Let's get to the numbers.

Foolish facts

Metric

Garmin

CAPS stars (out of 5)

Will Linear Technology Disappoint Analysts Next Quarter?

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There's no foolproof way to know the future for Linear Technology (Nasdaq: LLTC) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

AR that grows more quickly than revenue, or ballooning DSO, can suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Linear Technology do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Linear Technology sending any warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Apple's AirPlay Could Be a Big Hit

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Apple's (Nasdaq: AAPL) Airplay audio streaming system is a technology with the potential to become a Top 10 consumer electronics product, market research firm iSuppli said on Thursday.

AirPlay is a system that streams audio, either wirelessly or over Ethernet, to third-party speaker docks, A/V receivers, speakers and more. Far from just being a way to transmit video from the iPad to the AppleTV, as Apple CEO Steve Jobs demonstrated at its special event on September 1, AirPlay spans the entire audio industry, iSuppli said.

"AirPlay represents another effort by Apple to stake a leadership position in the burgeoning connected home market," said Jordan Selburn, principal analyst, consumer electronics, for iSuppli. "The technology leverages Apple's dominant position in the MP3/PMP player market. With AirPlay, the iPad, iPod and iPhone can be the servers for a home filled with music -- and music distribution via iTunes."

As evidenced by developments at the IFA consumer electronics show in Berlin this month, networked audio is gaining momentum, whether in complete systems like Sonos or in general-purpose equipment such as audio-video receivers supporting open standards such as DLNA. In addition to home music libraries, Internet Radio is also driving an increasing demand for audio that can be accessed seamlessly around the home.

Chief Justice Roberts Sold Pfizer. Should You?

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We run a series here at the Fool pointing out that a famous investor bought or sold a stock and then wondering whether you should follow suit, but the title of this one is rhetorical. I hope.

The fact that the head of the U.S. Supreme Court, Chief Justice John Roberts, sold his shares in Pfizer (NYSE: PFE) is getting a lot of press, but it isn't really relevant to investors -- unless you need to remove a conflict of interest to hear a court case, of course.

I do wonder if people blindly follow the gurus though. How many people try to mimic Warren Buffett's moves at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) without any regard for how Berkshire Hathaway's needs are completely different than their own? Buffett has even admitted the stupidity of the idea, pointing out that investors can make money buying small cap stocks that he can't touch because he has too much money to invest.

The answer to whether you should buy or sell Pfizer depends on the needs for your portfolio and your view of Pfizer's chances to succeed.

The best thing going for Pfizer right now is its solid 4.1% dividend yield. But that level or better is available from other pharmaceutical companies: Eli Lilly (NYSE: LLY) and Bristol-Myers Squibb (NYSE: BMY) sport higher dividends, while Merck (NYSE: MRK) is on par with Pfizer. You really need a reason for owning Pfizer over other drugmakers.

The integration of Wyeth is going well, and the added revenue will make the loss of Lipitor next year sting a little less. But the company needs to find a way to replace those lost sales and then some to grow. Replacing $12 billion is a difficult challenge.

So should you sell Pfizer? I can see how Pfizer could fit into some conservative portfolios, but many people would be better off with a midsized drugmaker that's growing -- think Gilead Sciences (Nasdaq: GILD) -- or larger pharmaceutical company that has a well-stocked pipeline -- consider Bristol-Myers. Whatever you do, don't sell Pfizer solely because Roberts did.

If you need more alternatives to Pfizer, consider the biotechs that this billionaire likes.

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Big Banks Abandon Proprietary Trading

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Goldman Sachs (NYSE: GS) and other big banks have seen the light! After tussling with lawmakers over the controversial issue of proprietary trading during the financial regulation battle, it appears that the big banks are straightening up and preparing to do right.

Business writer extraordinaire Michael Lewis explains on Bloomberg:

Having not merely preserved but bolstered their place at the heart of capitalism -- with little banks failing everywhere, the big keep getting bigger and stronger -- the major Wall Street firms have experienced an epiphany about their relationship to wider society. They don't need to screw people!

Newly able to raise their prices, they want to return to serving their customers, rather than exploiting them. ... In a smaller and less competitive financial industry, it will pay to be the nice guy, and so Goldman Sachs now wants to play nice.

There's only one problem. Just like Lewis' own reaction to his hypothetical explanation of the situation, I don't believe it.

Head-scratcher
But it's definitely happening. Goldman has already decided to disband its prop trading unit, and that unit is being hungrily eyed by firms such as Avenue Capital and KKR (NYSE: KKR). Morgan Stanley (NYSE: MS) and JPMorgan (NYSE: JPM) have announced similar plans as well, and Bank of America (NYSE: BAC) joined the parade today when it announced that it is laying off 20 to 30 of its prop traders.

What's so confounding about it is that the banks had actually won the right to more or less keep some internal trading action via the ability to invest up to 3% of capital in internal hedge funds. They fought tooth and nail to get this concession, and now they all seem to be collectively throwing their hands up and surrendering their victory.

What gives?

Sharks
It's hard to beat Lewis' imagery on this strange situation. He writes:

To see Wall Street turn its back on money is as unsettling as watching a shark's fin veer away, and then sink from view. It leaves you wanting to know where the shark has gone, and why.

And it's similarly hard to argue with his conclusions. After dismissing the highly implausible possibility of the banks simply deciding that it's time to ditch the shark act and start looking out for its clients, Lewis suggests that the movement away from proprietary trading is likely a combination of the fact that prop trading desks were starting to face tougher conditions and the firms have realized that they can run similar activities -- and, more importantly, reap similar profits -- through other parts of the bank. And with regulators bearing down, prop trading, at least under that specific name, is simply becoming a hassle.

Sharks are revered as the frightening rulers of the ocean because of their deadly ruthlessness. In that way, Lewis' imagery is perfect when comparing bankers to the giant fish. The sharks haven't swum away to find a nice spot to peaceably munch on some seaweed. They're just out of sight for the moment, readying for the next swift, deadly attack.

Charlie Munger doesn't have great things to say about Wall Street. Of course, Charlie Munger has plenty to say on a lot of topics.

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Dividend Mania

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As Fools Todd Wenning and Bryan Hinmon pointed out last week, the word "dividends" has received more media mentions than Lady Gaga over the past month.

This isn't surprising. One of the cool things about writing about markets is that you can gauge how investors feel at any given moment based on how readers react to articles. Over the past year, mention the word "dividends" and suddenly you're on everyone's good side. Dividend giants like Annaly Capital (NYSE: NLY), Altria Group (NYSE: MO) and Pfizer (NYSE: PFE) -- companies few cared about two years ago -- have become some of individual investors' favorite stocks.

Why is this?

The main theory I hear batted around is that with bond yields so low, investors who want yield are now forced to search in dividend stocks. It's the only place you find respectable yields. In that case, the reason dividends are so popular is because they're taking on the de facto role of bonds.

This makes sense, but this story might be deeper than that. I think the reason so many investors are suddenly enthralled with dividends is not just because they need a bond substitute, but because their perceptions of stocks have been fundamentally altered.

In the most distilled sense, there are two ways to make money in the stock market: either from dividends, or capital appreciation. Dividends, of course, are when companies write you a check. Capital appreciation -- an increase in a stock's market value -- comes either from earnings growth, or multiple expansion (the market's willingness to pay more for earnings).

For the better part of the past half-century, most investors focused almost entirely on capital appreciation as a way to make money. The hype wasn't about collecting a 3% dividend and compounding it over a lifetime; it was about buying a stock at $10 and selling it at $20, $30, or $40 as soon as humanly possible. You bought low and sold high. That was what the market was all about.

But all of that changed over the past two years. Since the crash of 2008, which sank markets back to levels not seen since 1996, talking about capital appreciation has become a sore subject, if not a sick joke. Given that stocks are now cheaper, that's a completely backwards mentality, but it's not surprising. It's hard to get fired up about capital appreciation when your portfolios has lost value over the past 10-12 years.

And due to our innate tendency to extrapolate past returns into the indefinite future, expectations of future capital appreciation have been chronically flattened. Just look at the P/E ratios on some high-quality stocks like Johnson & Johnson (NYSE: JNJ) and Microsoft (NYSE: MSFT). We're talking nine to 12 times earnings. The market is pricing in what looks like zero expected growth -- which isn't surprising given that both companies' stocks have been stuck in neutral for years. In so many cases, investors have all but given up on the possibility of future growth.

But think about what that means. If investors don't think they can earn much capital appreciation in the future, then there's only one other reason to be in the stock market: dividends.

That, I think, is why dividends are suddenly so popular. Return expectations have become so depressed that dividends are the only scraps of hope left to cling to.

And frankly, I think that's great news. The time you want to invest is when expectations are low. And today, they're pretty low.

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Fool contributor Morgan Housel owns shares of Altria, Microsoft, and Johnson & Johnson. Microsoft and Pfizer are Motley Fool Inside Value selections. Johnson & Johnson is a Motley Fool Income Investor pick. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Altria Group, Annaly Capital Management, Johnson & Johnson, and Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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Ford's Deceptively Simple Strategy

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Writing for the Fool has some cool benefits. One of those benefits came my way last week, when I had an opportunity to spend a few minutes talking with Ford (NYSE: F) CEO Alan Mulally.

I really enjoyed the conversation -- Mulally's enthusiasm is infectious -- and while he didn't tell me anything that would be news to anyone who has followed the company's turnaround closely, as a Ford shareholder it was great to hear his obvious excitement about the company's possibilities going forward.

If I were Mulally, I'd be excited too, because Ford is probably as well-positioned as it has ever been -- thanks to a simple-sounding plan with big consequences.

A long road back from the brink of disaster
The basics of Ford's turnaround story are well known: The company famously mortgaged everything it could, including the rights to its famous blue oval logo, to raise the money necessary to fund a turnaround through difficult economic times. That resulted in a horrific $30 billion-plus debt load, but it worked: Ford was able to continue funding product development through the worst of the economic downturn.

Now, the company is generating big profits and winning market share thanks to an array of well-received new vehicles, and management expects its cash level to exceed its remaining debt by the end of next year -- years ahead of schedule.

While the outline of the turnaround plan, originally dubbed "The Way Forward," was under way when Mulally arrived in September 2006, it was Mulally who led the mortgage-everything effort, and who, more than anyone else, took the company from there to here.

Mulally calls his approach "One Ford," and the overriding idea is deceptively simple: to run Ford as one company, with one set of products.

That might sound easy, but in practice, it's fiendishly complicated.

But really, only 20 products?
Speaking in London on Monday, Mulally said that Ford, which had 97 different models under several different brands when he arrived at the company, would eventually reduce its total number of "nameplates" to fewer than 30, perhaps as few as 20. "Fewer brands means you can

put more focus into improving the quality of engineering," Mulally said, according to a Bloomberg report.

These remarks spurred news stories and commentary around the world, so it's worth looking at what Mulally meant. "Brands" and "nameplates" in this context are referring to model lines -- for instance, while there are probably a dozen different variations of the upcoming new Focus for different markets around the world, they all have many parts in common, can be produced on identical assembly lines, and came out of one design and engineering program.

That sounds like a sensible approach, but for years, that's not how it worked. Producing a truly global car model is much more complicated than it sounds, largely because of government regulations. The safety and environmental features a car needs to pass regulatory muster in the European Union are different from, and in some cases conflict with, the features needed to gain approval to sell in the U.S. Add in China, Japan, Australia, Brazil, and other key markets, each of which has its own set of regulations, and you can see the scope of the problem.

This, together with different consumer priorities in different parts of the world, led automakers to fragment their offerings over the years. For a long time, the Ford Focus sold in Europe was a completely different car from the one sold in the U.S. Most automakers do this, to some extent. The Honda (NYSE: HMC) Accord you'll find at a dealer in Germany, for instance, looks very different from the one sold here. In fact, it's a completely different car, one more closely related to the U.S.-market Acura TSX than to the U.S. version of the Accord.

On the other hand, a Toyota (NYSE: TM) Corolla is a Toyota Corolla, no matter where you go -- despite local variations and different versions (hatchback, sedan, coupe, wagon), the basic engineering and production requirements are the same.

The goal of "One Ford": Big profits
That's the model Ford is seeking to emulate. Just as Nokia (NYSE: NOK) may sell dozens of different cell phones around the world, but can't match the profits Apple (Nasdaq: AAPL) generates from the same-wherever-you-go iPhone, Ford plans to have fewer models, each of which is sold in more markets. That will both reduce its fixed costs (allowing for more profit per vehicle) and increase its engineering focus (allowing it to lavish more attention and refinement on each design).

The upcoming Focus, officially revealed on Wednesday in Paris, is the first Ford designed from the ground up with this strategy in mind. Mulally has said that Ford has accelerated development on other products, and the implication is clear -- we should expect a slew of new "world" products over the next few years.

And that, in a nutshell, is Ford's opportunity: an Apple-like small set of top-notch models, each of which represents the company's very best effort in its segment, sold all over the world, with lower fixed costs (and thus higher profits) per car -- coming to market just as the global economy is recovering.

Can you see why Mulally is excited?

Read more of the Fool's global automotive coverage:

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Fool contributor John Rosevear owns shares of Ford and Apple. Nokia is a Motley Fool Inside Value recommendation. Apple and Ford Motor are Motley Fool Stock Advisor picks. The Fool owns shares of Apple. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

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BP's New CEO Begins With a Shakeup

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Beginning Friday, British oil giant BP's (NYSE: BP) CEO throne will be filled by the third occupant in just over three years. Robert Dudley will replace Tony Hayward, who had taken over for Lord John Browne in May 2007. Mr. Dudley is already making his presence felt by announcing the primary parts of a shakeup in the company's management and structure.

You're well aware that in April BP was the operator of Transocean's (NYSE: RIG) Deepwater Horizon rig when it exploded, burned, and sank in mile-deep Gulf of Mexico water, killing 11 workers and unleashing the mother of all U.S. oil spills. As oil gushed from the Macondo well until July, Hayward was unable to keep his tootsies from his mouth, a trait that ultimately got him the ax. In fairness, he'd likely have been removed anyway, simply for being at BP's top post at the time of the disaster.

Wobbling safety record
Hayward wasn't the first to besmirch BP's safety record. In 2005 a company refinery in Texas City, Texas, exploded, killing 15 workers and injuring 170. But the April tragedy was enough in itself to cause Congressman Henry Waxman, chairman of the Congressional Energy and Commerce committee, to accuse the company of maintaining a culture that "short-changed safety."

The congressman's reaction is particularly sobering when juxtaposed with Hayward's promise as the new CEO in 2007 to focus "like a laser" on safety. Beyond that, I've wondered since April how differently a similar event to BP's tragedy, but involving such clearly well-managed members of Big Oil as ExxonMobil (NYSE: XOM) or maybe Chevron (NYSE: CVX), might have been received.

For now, however, Dudley appears to be cracking the whip at BP, although there remain lots of unknown details to his plans. We do know that he'll create a new safety and risk unit under Mark Bly, who has been the company's top safety executive and headed the preparation of BP's investigation into the Gulf disaster. The unit will be vested with the authority to contest managerial decisions that it believes are risky.

At the same time, Dudley's new plans have caused Andy Inglis, the head of BP's exploration and production unit, to be hit by the same ax that got Hayward. Inglis will relinquish his board position on Halloween -- a date that we probably shouldn't read anything into -- and will leave the company completely at year's end. Inglis was effectively second in command in the company and oversaw drilling in the Gulf, so his departure isn't a surprise.

Changes upstream
Further, the upstream segment (exploration and production) will be divided into exploration, development, and production. Each of the three operations will be overseen by an executive with reporting responsibility directly to Dudley. The expanded structure will replace Inglis' sole control of all upstream activities.

There will also be a review of the company's relationship with its contractors. In the internal analysis of the causes of the Gulf explosion, Bly's team accepted a portion of the blame for the incident, but was only too happy to share the remainder with Transocean and Halliburton (NYSE: HAL), which was responsible for cementing the well.

That's about all we currently know about Dudley's restructuring plans. I, for one, am hopeful that the many blanks that remain will be filled in steadily in the weeks and months ahead. At this point, the laying out of the key parts of his changes is commendable -- especially since it occurred prior to his officially assuming the company's top position. But given Mr. Hayward's early promise to imitate a laser, there's also an element of déjà-vu to the situation.

This could be costly
And while the restructuring blueprints are being completed and implemented, Dudley and his minions will also be occupied by several ongoing probes into the cause of the Gulf accident. The results of these investigations are hardly insignificant: BP could be hit by civil fines of $1,100 for each and every barrel of oil spilled.

Or (and brace yourselves for this one), the amount could rise to $4,300 per barrel if gross negligence is determined to be involved on BP's part. This more serious finding would absolve Anadarko Petroleum (NYSE: APC) and Japan's Mitsui & Co., BP's partners in the well, from responsibility for the accident and related fines.

Preventing nothing
I'll also be watching the ongoing analysis of the key role of the rig's faulty blowout preventer (BOP) in fostering the accident. According to the BP internal report, "...most of

Pick Your Android Poison

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According to many critics,  Google's (Nasdaq: GOOG)  Android mobile platform is just too darn fragmented. Google's deliberately open attitude to hardware and software designs has left Android buyers swamped with a staggering array of choices. Compare the wild jungle of competing Android phones and OS versions to the Apple (Nasdaq: AAPL) iPhone: one phone a year, one software platform for that phone, and one user experience. Simple as Apple pie.

Google is acutely aware of the situation, but the folks at Mountain View are loath to call it a problem. Rather than clamping down on its many partners and demanding tighter design parameters for a more uniform experience, Google is launching a web site to help consumers pick the Android of their dreams.

Known as the Google Phone Gallery, the site makes it a snap to handily compare Android phones from different manufacturers and service providers. Verizon (NYSE: VZ) Droids sit next to Sprint Nextel (NYSE: S) 4G models, Motorola (NYSE: MOT) handsets, Samsung models, and so on.

But the service is far from perfect. It doesn't include every Android phone, and it's not completely accurate. The myTouch 3G I own is listed as running Android version 1.5 with no headphone jack, but the silly thing has been updated since launch, and now comes with a headphone plug and Android 1.6.

The Phone Gallery also isn't entirely necessary. On Google's site, you can only browse around for information. In contrast, when you go to the Best Buy (NYSE: BBY) mobile phone wizard, you'll be able to do the same thing -- and then buy a phone through Best Buy. Imagine that. Google's site does offer some hardcore technical data, like battery specifications, that Best Buy doesn't, but the retail giant's search options are arguably better. (That's a little embarrassing for a search specialist like Google, no?)

These shortcomings aside, the Phone Gallery seems like a productive way to recycle the old Nexus One store, which used to live at the same online address. Choosing an Android will obviously never be as simple as picking an iPhone, but this is a small step in the right direction.

Could Google do more to simplify the Android buying process? Should it do more? Discuss in the comments below.

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Best Buy, Google, and Sprint Nextel are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple and Best Buy are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Apple, Best Buy, and Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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5 Stocks Approaching Greatness

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Netflix Hits $100!David Gardner called Netflix in 2004 at $15.42. He’s up 684% as of July 13th. See what David’s recommending that you buy NEXT.

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Some companies are obviously great investments -- in hindsight. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?

The stars' walk of fame
On Motley Fool CAPS, these opportunities can be found among our four-star stocks. In CAPS' proprietary ratings system, they rank higher than most of the other 5,400 starred companies, but they're just shy of superstardom. While all the attention might be focused on their five-star peers, we can sift through CAPS to find four-star firms approaching greatness. Here are a handful of four-star firms approaching greatness.

Hewlett-Packard (NYSE: HPQ) Internap Network Services (Nasdaq: INAP) Isis Pharmaceuticals (Nasdaq: ISIS) LSI (NYSE: LSI) Western Digital (NYSE: WDC)

Some of these names might surprise you. For example, computing giant Hewlett-Packard is buying almost $4 billion worth of companies this month (3Par and ArcSight) and it's making a major investment in its Palm purchase. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold.

Last week we pointed out how Western Digital and rival Seagate Technology (NYSE: STX) were sporting miniscule margins as the market mispriced the value traditional storage systems still hold. However, the 170,000-plus CAPS members chose these companies as less obvious sources for tomorrow's great buys so let's see why they might merit your attention.

In the sight of greatness?
Another storage name exhibiting weakness is LSI, whose revenues in its most recent quarter missed analyst expectations and came in at the low end of its own guidance. Inventory adjustments at customers who were previously buying up product in the first quarter hit its results, and LSI issued a cautious outlook for the third quarter.

The apparent misstep doesn't much concern CAPS members who still strongly support the chip maker. CAPS member jsGreenmachine says it's been through the cycle before and will be around to go through it again in the future:

Chip maker that has out-lasted most firms through the cycles. Top decision makers know what it takes and the time is now!

On the shoulders of giants
Datacenter operator and Internet traffic router Internap Network Services continues looking to new markets for growth, including content delivery network services. But revenues fell 6% last quarter as the switch from reseller to facilities-based datacenter provider tries to gain traction. The controlled churn has eaten into the top-line numbers, but margin expansion is under way, suggesting the bundling of services that it's undertaking is paying off.

Before you rush to buy in, note that it's bumping up against industry leader Akamai Technologies (Nasdaq: AKAM), which handles about 20% of all Internet traffic, Limelight Networks, and Level 3 Communications. There's no shortage of competition in this space and Internap will need to distinguish itself further.

The CAPS community remains solidly behind Internap, however, as 92% of those rating it think we'll be seeing market-beating performance in the months ahead. You can add your ideas on whether the change will work out as planned on the Internap Network Services CAPS page and put it on your My Watchlist page to find all the Foolish news and analysis about the company.

A big opportunity
It was a scene we've seen played out before at Isis Pharmaceuticals, which reported that cholesterol drug mipomersen had similar outcomes to phase 3 data reported earlier this year. With severe liver enzyme-elevating side effects, Isis and Genzyme may find their treatment has a narrower patient population to attract, but the ability to significantly reduce cholesterol levels will enable them to still generate sales, just at a much lower level. That's good enough for CAPS member irishred1, though, as Isis is still financially sound:

robust balance sheet, a good entry into RNAi along with ALNY, and believe that mipomersen has a good shot at approval even if its use will be restricted

Although Isis went on to report an earnings loss that was wider than anticipated because research and development spending rose, management hopes full-year losses will be smaller because of a new partnership with GlaxoSmithKline.

A great opportunity for you
Investor sentiment suggests these four-star investments still seem to be on their way to five-star greatness, but it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page.

Sign up today for the completely free service and let us hear what you have to say about the great and almost great companies that interest you.

Love this article? Get our best articles delivered direct to your inbox at no cost. Sign up for Foolwatch Weekly by entering your email below.

Akamai Technologies is a Motley Fool Rule Breakers selection. GlaxoSmithKline is a Motley Fool Global Gains recommendation. The Fool owns shares of GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey currently does not own any stocks as you can see here. The Motley Fool has a disclosure policy.

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The Best Automaker for Your Portfolio

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I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Ford Motor (NYSE: F). Is America's comeback automaker the real thing? Let's get to the numbers.

Foolish facts

Metric

Ford Motor Co.

CAPS stars (out of 5)

Summertime, and the giving is easy

E-mailFrom Thursday's Globe and MailPublished Thursday, Jun. 17, 2010 7:00AM EDTLast updated Friday, Jun. 25, 2010 4:27PM EDT4 commentsEmailTweetPrintDecrease text sizeIncrease text size

Okay, so it’s the summertime. We’re not supposed to talk about snow in the summer. Or hockey (well, hockey is okay – it’s our national pastime). We’re not supposed to think about pumpkins, leaves turning colour, or – heaven forbid – charitable giving. Isn’t charitable giving that thing you do in December each year just before the deadline for obtaining a donation tax credit for the current year? Yup. That’s the approach most people take to charitable giving. Too bad, really.

Buffett, Gates challenge fellow billionairesFor 'philanthropreneurs,' a charity is a serious investmentTab for lunch with Buffett?
A cool $2-million

You see, there’s a difference between charitable giving and strategic philanthropy. Charitable giving is short-term, spontaneous, ad hoc expressions of brief generosity. It’s what you do when that canvasser comes knocking at your door for a few dollars for a particular charity. That’s charitable giving.

Strategic philanthropy – that’s something different altogether. It involves a plan. It involves thinking ahead – something that most of us are not particularly good at. Strategic philanthropy is about taking a long-term approach to giving back. Yes, it’s even about considering ways to give back in the middle of the summer (I’m sitting on the dock at the cottage as I write this).

Giving back to society is not mainly about the tax savings. It’s about making a difference. It’s about moving yourself from success to significance. And when did thinking about the welfare of others become a fall/winter sport? So, here we are in the summer, talking about philanthropy.

Social capital

Believe it or not, a portion of your income and wealth is earmarked for the betterment of society – whether we like it or not. Call this your “social capital.” If we choose not to give to others, the government will do it on our behalf – through the tax system. I call this “involuntary giving.” I can’t think of a more unsatisfying way to give than have the folks in Ottawa decide for me how to use my social capital.

A much more fulfilling way to give is to self-direct your social capital. Let’s face it, consciously choosing how much to give, when to give, how to give, and whom to give to comes with advantages. It’s much more efficient than sending the money to Ottawa. It’s more effective and more timely. It can come with recognition – if you want that.

Oh, and then there are tax savings from the donation tax credit. You’re including the government as your partner in your giving – and you’re calling the shots. I like that.

Giving strategy

While tax savings should not be your primary motivation for making a donation, it pays to make gifts wisely. Consider one clever idea that involves donating securities to charity. It’s no secret that in 2006 the federal government changed the rules to allow an elimination of a taxable capital gain when making a donation of publicly traded securities to a registered charity.

Want an example? Suppose you have $100,000 in XYZ shares with a $50,000 adjusted cost base (ACB). Suppose you want to sell those XYZ shares, and have thought about donating them to charity to eliminate the capital gain. Problem is, you don’t want to make a $100,000 donation to charity. Try this: Donate $20,000 to charity, and keep $80,000 for yourself. The result? You’ll face tax of $9,200 (at a marginal tax rate of 46 per cent) on the $80,000 worth of shares when you sell. You’ll face no tax on the other $20,000 since you’re donating them to charity. In addition, you’ll be entitled to a donation tax credit for the $20,000 donated, which will save you tax of $9,200. Bottom line? The tax savings from the $20,000 worth of shares donated will offset the tax on the $80,000 you kept for yourself.

What does it actually cost you? Well, if you had kept the full $100,000 for yourself, you would have walked away with $88,500 after taxes. Now, you’ll keep $80,000 instead. So, you’re giving up $8,500 in order to give the charity $20,000. I call that a charitable arbitrage opportunity.

So, how do you know how much of the $100,000 to donate to charity to offset the tax bill on the shares you choose to liquidate and on which you keep the proceeds? There’s a formula that works in most provinces, at most income levels. Here it is:

The amount to donate equals: (FMV)(FMV – ACB)/(3 FMV – ACB), where FMV is the fair market value of your investment and ACB is your cost amount. In our example: ($100,000)($100,000 - $50,000)/(3 x $100,000) - $50,000

How to defer tax by using a holding company

E-mailFrom Friday's Globe and MailPublished Thursday, Jun. 24, 2010 7:50PM EDTLast updated Thursday, Sep. 09, 2010 7:07AM EDT4 commentsEmailTweetPrintDecrease text sizeIncrease text size

This summer when you’re standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning. I can tell you from experience that you’ll bore them to tears with the conversation, but they’ll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.

How to structure a cash-saving instalment planHow taxes affect your financial healthTangling with the taxman over losses

THE RULES

If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax. How? By establishing a holding company to own the shares of your active business corporation (ABC). You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends. If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.

It’s subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are “connected” under our tax law (which will be the case in the vast majority of situations), you’ll avoid another tax called the Part Four tax.

By passing some of those earnings from your ABC to your holding company, you’ll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus. The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.

THE STRATEGIES

What strategies should you be thinking about?

Multiple shareholders: If you’re one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you. Think of each holding company as a tap to control the payment of dividends to each of you personally. Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.

Splitting income: Your holding company can be owned by more than one person in the family. Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared. It’s not always advisable to issue shares in the holding company directly to your children (and if they’re minors, this isn’t possible), and so a family trust can be utilized, which brings me to the next strategy.

Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust. The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company. Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you’ll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are “connected.” The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.

Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.

Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or “pension” that you will need to look after yourself in retirement.

Related Read Tim Cestnick's Tax Matters columns4 commentsEmailTweetPrintDecrease text sizeIncrease text sizeToday's Must ReadsSports Blue Jays hail retiring GastonNews ‘Mr. Vancouver’ seeks help to finish his magnum opusGlobe Drive Strategies for last IndyCar race of the seasonLife Hogtown’s burger wars could use a Five Guys pattyLife How do I get my sister to leave her unhappy marriage?More from The Globe and Mail

Don't Be Misled in This Valuation

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Netflix Hits $100!David Gardner called Netflix in 2004 at $15.42. He’s up 684% as of July 13th. See what David’s recommending that you buy NEXT.

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Earlier this week, I wrote a post on my blog in which I pointed out that some companies involved or associated with streaming movies or TV shows over the Internet have valuations that, in my opinion, are being inflated by all the excitement around the subject of streaming video.

In short, they're based on the incorrect impression that streaming movies and TV shows are going to replace DVDs or put the cable companies out of business in the near term.

Et tu, Fool
Anders Bylund responded with "This Is No Digital Media Bubble," suggesting that he caught me with my "foot in my mouth." While I appreciate a good discussion on the topic, there are a few things in Anders' article that don't make sense.

For starters, Anders implies that I suggested Netflix (Nasdaq: NFLX), Akamai, and Amazon (Nasdaq: AMZN) are overvalued. While I did make that case about Netflix and Akamai, it wouldn't be accurate to talk about Amazon's valuation in that lineup, because today Amazon makes very little money at all from streaming movies and TV shows.

I also argued that, today, digital content offerings from the likes of Hulu, Netflix, Apple, and Amazon are a complement to traditional media. There is no doubt that digital is growing, but online video is not replacing cable, and streaming movies are not replacing DVDs anytime soon. Seismic shifts like that usually happen over a long period of time, usually measured by a decade or more.

Bylund counters that consumers moved quickly from the VHS format to DVDs -- but it's not a relevant comparison. With digital, we're talking about consumers moving to a completely new format that is free of any physical media of any kind. That's very different from comparing the growth of consumers moving from one physical media format to another.

Get ready for a good conversation
Bylund does say that "we could argue all day about the promise of digital media or the rate at which online movie streams and direct downloads are replacing cable TV and DVDs, but I'll leave all that for another day." My question is, why wait?

This is exactly the topic we should be discussing, since the growth and adoption rate of digital is one of the major factors that influences the share price of companies in the digital arena. And the great thing about this topic is that we don't have to "argue" about the rate of growth -- we have plenty of data in the market to prove that it takes more than a few years to see consumers replace one kind of media distribution with another.

To put it in perspective, Netflix has already been streaming for three years, and while it has been the hands-down leader, cable TV is not going away anytime soon. Many seem to think that Netflix has changed the industry overnight, but it has taken it more than three years to get even this far.

While Netflix is absolutely having an effect on how content is consumed (and thus is affecting the cable and DVD business), I stick to my argument that far too many investors are using excitement rather than realistic data to value companies. Just this week, NPD released data to show that in the past three months, 75% of all U.S. consumers did not stream or download any multimedia content of any kind.

The bottom line is that the consumption of digital media is growing, it's affecting multiple media industries, and it's very exciting. But one service is not replacing another anytime soon. Even with the positive balance sheets that Apple, Akamai, and Netflix have, one can't let the excitement around streaming movies and TV shows be the major catalyst for valuing them more highly.

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Akamai Technologies is a Motley Fool Rule Breakers recommendation. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor selections. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days.

Dan Rayburn is EVP for StreamingMedia.com, a principal analyst at Frost & Sullivan, and is recognized by many as the voice for the streaming and online video industry. He doesn't own any of the companies mentioned here -- or any companies at all, for that matter. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

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Home ownership: Headaches and tax breaks

E-mailFrom Friday's Globe and MailPublished Friday, Jul. 02, 2010 7:00AM EDTLast updated Thursday, Jul. 22, 2010 1:06PM EDT6 commentsEmailTweetPrintDecrease text sizeIncrease text size

Some people have the worst kind of luck. I think about my friend Janice. She bought a home seven years ago and has had nothing but mishaps since.

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In 2003, she had a flood and ended up with a foot of water in her finished basement. In 2005, lightning struck a huge tree in her yard, part of which fell onto her car in the driveway. Then, last week, a driver lost control of his car in front of her home, drove across her lawn and knocked over her fence.

“I’m just about to give up on home ownership, Tim,” she told me this week. “This house has always given me headaches.”

“Well, I know a guy who is a feng shui specialist,” I replied. “For a few bucks maybe he’ll fix the problem.”

The fact is, home ownership can be the best investment you’ll ever make – despite the regular headaches. If you’re in the market to buy a home, think about a few tax tips that could save you a bundle in taxes.

1. Principal residence exemption. You’re likely aware that selling a home can be a tax-free event. The reason? Each “family unit” is entitled to designate one property as their principal residence. A family unit consists of you, your spouse or common-law partner, and any unmarried children under age 18. You have to ordinarily inhabit a place to call it your principal residence, but you’ll be entitled to an exemption to shelter any capital gains on a sale of your principal residence later. If you own more than one property, speak to a tax pro about the exemption because the rules can be complex.

2. Home Buyers’ Plan (HBP). The HBP will allow you to borrow, tax-free, up to $25,000 from your registered retirement savings plan (RRSP) for the purpose of buying or building a home. You must be a first-time home buyer, which will be the case if you or your spouse (or common-law partner) haven’t owned a home that you occupied as a principal residence in the year of the RRSP withdrawal or the preceding four years. You generally must repay the amount back to your RRSP over a 15-year period. Be aware that I’ve simplified the rules here. Check out Canada Revenue Agency’s publication RC4135, available at cra.gc.ca, for more.

Thinking of renovating?Doing home renos? Call your insurer What are some renovations that add value to my home? When is renovating my home a good investment? Stage your home like a pro for free Understanding house prices Home renovation: How much to spend, and where Want to boost your home's value?

3. First-Time Home Buyers’ Tax Credit. The 2009 federal budget introduced a new tax credit for first-time home buyers. If you buy a home and you and your spouse (or common-law partner) haven’t owned a principal residence that you occupied in the year of your purchase or the preceding four years, then you may be entitled to a tax credit worth up to $5,000, multiplied by 15 per cent (the applicable percentage for 2010), or $750. The credit can be claimed by either spouse, or both, as long as the total doesn’t exceed the allowable $750.

4. Deducting expenses. You may be entitled to claim a deduction for a portion of home costs such as mortgage interest, property taxes, utilities, repairs, landscaping, and more. How? Two ways. First, think about establishing a home-based business and a home office which is your principal place of business, or is used on a regular and continuous basis for meeting clients. If this doesn’t suit your fancy, then consider renting out part of your residence to a tenant. Your property will still be considered your principal residence even when you use it to earn income (from rents, or a business) as long as the partial use of the place for income-producing purposes is ancillary to the main use as your principal residence, you don’t make any structural change to the property, and you don’t claim capital cost allowance (CCA) on the property. Finally, don’t forget to claim moving expenses if you make a qualifying move to a new residence.

Income Properties: Investor EducationWhat are ways to get cash from my home? Should I sell my home, rent it out, or borrow? How do I compare my options to get income from my property? Does it make sense for me to borrow against the value of my home?

5. Multiplying exemptions. It may be possible to shelter the capital gains on more than one principal residence. How so? Prior to 1982, each individual was able to designate their own property as a principal residence. For properties owned prior to 1982, it may still be possible to shelter, at least in part, a gain on more than one property. This generally involves putting each property into separate names rather than holding them jointly. The rules are complex enough to make your head spin, so speak to a tax pro for more details.

Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.

Learn more in our Investor Learning CentreGetting income from your home: Clifford and Carmen's storyProtecting a mortgage: Marissa and Marcello's storyChapter 5 : Do I need any special insurance coverage?Chapter 4 : What insurance do I need for my home?Chapter 3 : What insurance do I need for my car?Chapter 2 : What property do I need to insure?6 commentsEmailTweetPrintDecrease text sizeIncrease text sizeToday's Must ReadsSports Blue Jays hail retiring GastonNews ‘Mr. Vancouver’ seeks help to finish his magnum opusGlobe Drive Strategies for last IndyCar race of the seasonLife Hogtown’s burger wars could use a Five Guys pattyLife How do I get my sister to leave her unhappy marriage?More from The Globe and Mail

It pays - literally - to invest with the taxman in mind

E-mailFrom Thursday's Globe and MailPublished Thursday, Jul. 22, 2010 7:00AM EDTLast updated Thursday, Jul. 22, 2010 8:42AM EDT8 commentsEmailTweetPrintDecrease text sizeIncrease text size

I have a good friend who’s a personal trainer. He often talks to me about proper nutrition. Last time we spoke he was singing the praises of eating 25 grams of fibre daily. I’m actually very good about eating properly. In fact, I ate so much fibre yesterday that I’m a little concerned I might pass wicker furniture if I’m not careful. Proper nutrition is not something you have to focus on. But if you ignore it, you’ll suffer for it later.

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Active tax management (ATM) around your investment assets is much the same. I spoke last week about the value you can add to your investments over time through the minimization of taxes. ATM is not something you have to focus on, but if you ignore it, you’ll suffer later. I shared last week that studies have shown you can potentially add 2 to 3 per cent to your after-tax returns annually through proper ATM.

Salary or dividends?

E-mailFrom Thursday's Globe and MailPublished Thursday, Sep. 30, 2010 6:30AM EDTLast updated Thursday, Sep. 30, 2010 8:07AM EDT4 commentsEmailTweetPrintDecrease text sizeIncrease text size

This week I was reviewing some résumés of potential job candidates, and in the references section of one résumé, I read the following: “I regret that I am not able to provide references since every business I have worked for in the past has gone bankrupt.” If you happen to be applying for a job, you might want to sweep that fact under the carpet.

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Tangling with the taxman over losses

Tim CestnickFrom Thursday's Globe and MailPublished Thursday, Jul. 29, 2010 6:00AM EDTLast updated Thursday, Jul. 29, 2010 12:45PM EDT0 commentsEmailTweetPrintDecrease text sizeIncrease text size

My family and I went out for dinner last week. Whenever we go out to eat, the kids never finish their meals. So I end up eating their leftovers. That’s right, I'm the dog with the credit card.

Is a condo a good investment?It pays - literally - to invest with the taxman in mindHome ownership: Headaches and tax breaks

On this occasion the kids and Carolyn went off to do some shopping and left me to finish eating. I struck up a conversation with the gentleman alone at the table next to me. “Don’t tell me,” I said. “You’re the dog with the credit card too?”

We started talking about our vocations, and then the conversation turned to a tax problem he had. Turns out he owned a couple of rental properties, had been claiming losses, and the taxman wasn’t impressed. His losses were denied by the Canada Revenue Agency and he was wondering what to do. I shared with him the story of a couple who had a recent battle in the Tax Court of Canada over the same problem.

The story

On Feb. 5 of this year the Tax Court of Canada handed down a decision in the case Milan Opacic and Dragica Opacic v. The Queen (2010 DTC 1079). You see, in the years 2002 to 2007 Mr. and Mrs. Opacic had each reported rental losses on an apartment they owned in Bosnia, rental losses related to a store in Serbia, and business losses from a partnership carried on in Canada. They had each reported about $21,000 in losses from the rental activities over those years, Mr. Opacic reported about $59,000 in losses from the partnership over that time, and Mrs. Opacic reported about $32,000 in losses from the partnership over those years.

Income Properties: Investor EducationWhat are ways to get cash from my home? Should I sell my home, rent it out, or borrow? How do I compare my options to get income from my property? Does it make sense for me to borrow against the value of my home?

The benefit to the couple, of course, is that business and rental losses can be applied against other income. So the tax savings added up over those years. The CRA didn’t like this, and reassessed the couple for their 2004 and 2005 tax years, disallowing a portion of their rental expenses and all of their business losses.

The outcome

And so the court battle began. In the end, the court dismissed the appeal of Mr. and Mrs. Opacic. The couple lost this battle. You see, in 2002 the Supreme Court of Canada handed down a decision in the Stewart case (2002 SCC 46) which provides the criteria that must be considered when evaluating business or rental losses and whether they should be allowed.

Where a “source of income” exists, then reasonable expenses incurred for the purpose of earning that income must be allowed, and if this results in a loss for the taxpayer, CRA is out of luck. There’s no room in that case for CRA to disallow losses just because it’s the view of CRA that there is no reasonable expectation of profit (REOP).

In the Stewart case, the court decided that if an endeavour is clearly commercial in nature, with no personal element to it, then a source of income does exist. This is not to say that the endeavour must produce a profit in any year. Where an endeavour is commercial in nature, there's no room to apply the REOP test to disallow losses.

Now, where an endeavour has some personal element to it (such as when you partly rent out and partly live in a property or run a business akin to a hobby), a source of income may still be considered to exist where your behaviour suggests that there is a “sufficient degree of commerciality.” That is, when it's clear your intent is to generate a profit. In this case, the taxman can apply the REOP test as just one of many factors to determine whether or not the activity is sufficiently commercial in nature.

A primary motivation to avoid tax does not affect the validity of a transaction for tax purposes. As long as an endeavour is commercial in nature (in pursuit of profit), your deductible expenses should be allowed – even if they exceed your income.

As for Mr. and Mrs. Opacic, the court looked at the following factors to determine whether their activities were commercial in nature: (1) their profit and loss experience (they lost money five consecutive years), (2) the taxpayers’ training, (3) their intended course of action (no steps were taken to make the ventures profitable after showing losses for five years), and (4) the capability of the ventures to show profit (the judge felt there was none).

What about you? Build the case that you have a commercial activity by considering the above criteria and you’ll likely be fine even if you have losses.

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Pensioners 'unfairly' targeted by taxman

Pensioners have been unfairly hit with "unexpected tax bills" following poor decisions taken by HM Revenue & Customs, the official watchdog warned yesterday. 

By Robert Winnett, Deputy Political Editor
Published: 11:24AM BST 21 Sep 2010

Comments

The official adjudicator who deals with complaints about HMRC said she had become "seriously" concerned about the increase in cases she has to resolve where tax inspectors have targeted "vulnerable groups of people, particularly pensioners".

Last year, the adjudicator ordered HMRC to pay more than £100,000 in compensation to taxpayers it was deemed to have treated unfairly or poorly. The tax authority was also told to write off almost £1.8 million in tax credits it had overpaid.

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Shifting income? You still might pay the tax

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Some things just seem a little backward. Take my cousin Julia’s situation for example. Julia is an environmentalist – a self-proclaimed “tree-hugger,” to use her words. Her husband is a competitive swimmer. She doesn’t shave her legs, but he shaves his. It just seems backward to me.

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The folks at the Canada Revenue Agency (CRA) often take offence to things when they’re backward. No, I’m not talking about personal grooming habits – CRA doesn’t care much about whether or not you shave your legs. But CRA does care when someone else pays a tax bill and it should be you paying the tax instead.

The rules

Let me tell you about subsection 56(2) of our tax law, which can cause real problems in certain situations. Specifically, this subsection will cause certain amounts to be taxed in your hands even when the amounts were received by someone else. Subsection 56(2) applies when the following conditions are met:

1. There is a payment or a transfer of property to a person other than you.

2. This payment is made at your direction, or with your concurrence.

3. There is a benefit to you, or a benefit you wish to confer on the other person.

4. You would have been taxable on the amount had you received the payment or transfer of property.

In situations where these conditions are met, subsection 56(2) will cause the amount to be taxed in your hands rather than the hands of the other person who received the amount. If subsection 56(2) applies, the amount in question will need to be added to your income; CRA will however reduce the income of the person who initially received the amount, in order to prevent double taxation.

The examples

Clear as mud so far? Let me share a few examples where 56(2) might apply.

Corporate class mutual funds can save you money

E-mailFrom Friday's Globe and MailPublished Thursday, Aug. 12, 2010 6:09PM EDTLast updated Friday, Aug. 13, 2010 1:24PM EDT4 commentsEmailTweetPrint/LicenseDecrease text sizeIncrease text size

This week, I was sitting on a park bench down by the waterfront in Oakville, Ont. Three elderly gentleman, who looked to be in their 80s, were at a picnic table close by and, though I couldn’t really make out everything they were saying, it sounded like a story I’d heard before somewhere. I’ll call them Larry, Curly and Moe. I think it went something like this:

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Larry: “Windy, isn’t it?”

Curly: “No, it’s Thursday.”

Moe: “So am I. Let’s go get a milkshake.”

Curly: “I said Thursday!”

Larry: “No, it’s Monday!”

Moe: “Don’t get me started on money. I just paid my taxes.”

Curly: “Taxi? We don’t need a taxi. The bus will come by in 20 minutes.”

Larry: “Taxes! Let me tell you about taxes. My grandson, he has a clever idea about saving them.”

Larry then spent about 15 minutes trying to tell the other two about some sort of technology that can save investors some serious tax dollars. As it turns out, it’s an investment technology that really exists and I can tell you about it.

The Problem

If you’re an investor who uses mutual funds or investment pools to take advantage of professional money management, a tax liability can rear its ugly head in two common situations: First, you may receive taxable distributions from the fund on an annual basis. When the fund earns income or realizes capital gains, that income is generally distributed to you and is taxed in your hands. You have little or no control over the type, timing and amount of these distributions.

Second, you’ll face tax when you sell all or some of your units in a particular fund if your investment has appreciated in value. The end result? Based on studies I referred to in my article on July 15, you could lose between 2 and 3 per cent annually to income taxes on distributions and dispositions.

The Idea

Corporate class mutual funds. CCMFs are simply mutual funds that are not structured as trusts, as is most commonly the case, but as shares in a corporation. Most mutual fund companies offer CCMFs, and have for many years, but these are often misunderstood as a tax tool.

How do they work? A particular mutual fund company may establish a mutual fund corporation that consists of several share classes – class A, class B, class C, and so on. Each share class represents a particular mutual fund. So, if you own the class A shares of a mutual fund corporation, you might, for example, be owning a Canadian equity fund. The class B shares might represent a global fixed-income fund. You get the picture.

The key tax advantage is that you can now avoid one of the two tax problems I spoke of earlier. Specifically, you can avoid the tax when disposing of your interest in a particular mutual fund – as long as you switch to another fund, or share class, in the same mutual fund corporation. So, if you switch from the class A shares (Canadian equity fund) to the class B shares (global fixed-income fund) in my example, you’d pay no tax on the switch, even if your shares of the class A fund had appreciated in value.

The Enhancement

What if you could not only reduce your taxation on leaving one fund and entering another (which any CCMF will do) but also control the other level of tax I spoke about: Tax on distributions? At least one mutual fund company has developed a way to offer this flexibility.

Nexgen Financial has created a mutual fund corporate structure that has different “tax classes.” That is, you can choose the type of income you want to receive by simply choosing the appropriate tax class.

You could, for example, choose a bond fund (which normally would distribute interest income), but opt to receive your returns as Canadian dividends instead (eligible for a reduced rate of tax, thanks to the dividend tax credit). Nexgen has applied for patent protection on their “investment technology.”

Of course, you still have to be content with expected investment performance and fees, but if you’re satisfied with these, Nexgen’s approach offers some interesting opportunities: Choose the capital gains class if you have capital losses you want to utilize or if you want to split income with minor children. Choose the return of capital class if you need cash flow but would rather pay tax on capital gains later than paying tax today. Choose the capital growth class if you want to make a donation of securities to charity. The planning ideas can go on and on.

Controlling the type and timing of your tax bill is a powerful capability when increasing your net worth.

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Unpaid tax to be "written off"

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Staff said the majority of the money would not be pursued because the cases were more than two years old and could be challenged by taxpayers.

The revelations, aired on The Report on BBC Radio 4, come just weeks after it emerged a further six million people had been wrongly taxed in the past two years, with 1.4 million people who underpaid set to receive an unexpected tax bill.

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A member of staff said: “I’m working on a list of underpayments. For each underpayment, there are £1000s of pounds owed. Underpayments are very frustrating - people who have not paid enough, I do a list of what I find at the end of the day for my manager - its £100s, sometimes £1000s of pounds across 1000s of cases. If we had the chance to sort it out three years ago, we could have recovered the money. Now its likely to be written off."

The tax fiasco stems from a combination of a historical backlog, additional work created by problems with a new computer system and a shrinking number of staff.

HMRC has cut 20,000 jobs since 2006and aims to shed a further 5,000 by next year.

Mike Warburton, of accountants Grant Thornton, said: “It is important to treat comments from whistle blowers with caution but it would not surprise me if staff at HMRC offices are being overwhelmed by the volume of work they are having to cope with.

“The PAYE system is now outdated and unable to cope effectively with modern work patterns and an increasingly complex tax system. That is why the Government are consulting on ways of reforming the system."

A spokesman for HMRC said: “No tax is being written off. We are simply prioritizing repayments to vulnerable groups.”

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How to finance a post-secondary education

E-mailFrom Thursday's Globe and MailPublished Thursday, Aug. 19, 2010 6:30AM EDTLast updated Monday, Aug. 30, 2010 4:15PM EDT12 commentsEmailTweetPrintDecrease text sizeIncrease text size

Aside from the long-term financial benefits of a post-secondary education, the life experiences acquired along the way will shape the perspectives and potential of tomorrow’s leaders.

Be a debt-free gradPaying with plastic for your child's education?Paying for college: Beg, borrow, steal, sweat and save

A friend of mine attended a college in Claremont, Calif., back in 1996. At that time he was part of a class project working to develop an alternative manure-based fuel supply for Guatemalans in a village where firewood was scarce. In order to produce realistic, village-based waste, my friend was instructed to eat only beans, rice and tortillas for a week. Unfortunately, the diet made him constipated and the project was scrapped when it couldn’t be finished by the due date.

Middle class homeowners spared council tax hike

Seven million homeowners are to escape paying hundreds of pounds more in council tax after the Government delayed a nationwide revaluation for another five years. 

By Christopher Hope, Whitehall Editor
Published: 11:00PM BST 23 Sep 2010

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Paying for college: Beg, borrow, steal, sweat and save

E-mailFrom Friday's Globe and MailPublished Thursday, Aug. 26, 2010 6:29PM EDTLast updated Monday, Sep. 27, 2010 3:30PM EDT6 commentsEmailTweetPrintDecrease text sizeIncrease text size

As I was searching the news archives this week for articles dealing with the education of our children, I found some interesting headlines. “Kids Make Nutritious Snacks,” “Teacher Strikes Idle Kids,” and “Local High School Dropouts Cut in Half,” are just a few I found by way of The Star Tribune in Minneapolis, which went through the trouble of collecting such classics back in March, 2000.

Back to schoolStudents urged to use credit cards with cautionHow to finance a post-secondary education

Then I stumbled across the results of a survey sponsored by Fidelity Investments in the U.S. as published in the Investment Weekly News in June of this year. It’s a survey on the costs of education, and while it’s a U.S.-based survey, some of the findings are sure to be equally applicable in Canada.

Joe Ciccariello, a spokesman for Fidelity, had this to say: “When we looked at