Death, Taxes and Dave Grohl

Its been a while since my last blog.  I am finding it difficult to find new interesting things to write about.  Why not rehash some old ones?  Death and Taxes …. and maybe throw in some Dave Grohl. 

Death

I have been interested in funeral and cemetery providers for a few years now.  As we have learned it can be a profitable niche to consolidate a fragmented industry. 

Memorial services and funeral operations are not exciting businesses.  As you can imagine they are dull and quiet affairs, much like funerals themselves and I hate funerals!   I’m always uncomfortable and trying not to say the wrong thing.   

Normally, I would not be too interested in a low return of equity industry but there are a few interesting quirks that have peaked my interest. 

With all acquisitive companies there is a lot of goodwill on the balance sheets.  Goodwill is an accounting measure that accounts for the difference in the price you paid for a business and the balance sheet book value of their assets.  Re-investing in goodwill is not required to maintain the business. It is not like having a traditional asset heavy business and continually having to upgrade the factory or repair the roof etc.  Goodwill investments are only required to grow the business.  

The return profile of the business looks a lot better once you strip the goodwill out of your calculations.  

Also, to solve the problems of maintaining of a cemetery after your loved ones are buried, cemetery owners are required to have a trust fund to help fund this maintenance.   Families also like to prepay their funeral needs to ease the burden on their loved ones after they pass.   There are limitations on how the funds are invested so it is potentially not as useful as insurance float but having substantial extra assets on your balance sheet is a good thing. 

Memorial Services providers may have been in a slump for the last couple of years as the industry deals with a declining deathrate.  Covid 19 impacted the economy in many unpredictable ways but it is fairly clear that Covid altered the mortality trends by “pulling forward” deaths in the most vulnerable populations.   This caused a very busy period for memorial companies but often families were less free to get together and celebrate the life of their beloved.   This has caused the death rate in the period after this Covid related demand to be abnormally slow. 

If one thing in life is certain, the death rate will return to the pre-Covid norm at some point and when it does these businesses should prosper if they can keep their administrative costs down!

Taxes

Great!  I just bored you by talking about death now lets rip the Band-Aid off and talk about taxes too.  Let’s do this!

In order to cover the rising cost of government in Canada the federal government has decided on several tax changes in the budget.  The most impactful change for most investors is the change in the inclusion rate on Capital Gains. The inclusion rate simply the amount of a capital gain that is included as normal income for tax purposes.  The rate prior to the change was 50%. 

So if an investor had a $10,000 capital gain only half would be added to their income and taxed at their marginal rate.  In the new budget, it is proposed that the rate change to 66.7% so two thirds of the gain would be added to the investor’s income. 

To soften the blow, the government decided that individuals (explicitly not trusts and corporations) would get an annual $250k exemption where they would be allowed to use the old 50% inclusion rate.  

The goal is to have the wealthiest Canadians pay a higher rate of taxes.  In practice the tax changes will most impact any Canadians that own a secondary property, an income property or have large unrealized gains at the time of their death.  

It has been our practice to defer capital gains as long as possible and earn compound returns on the money not paid in taxes.   We will need to include more tax planning for clients as they get older to manage this now more complex tax system. 

Dave Grohl

As you may have read in my previous posts here and here, I am a fan of reading and tend to read a lot.   My preferences after the newspapers tend to be business, business biography and anything by Michael Lewis (perhaps except Going Infinite) and Malcolm Gladwell. 

I haven’t written much about what I have been reading lately because frankly, I prefer reading to writing about reading.  

I can say that I thoroughly enjoyed Dan Davies book Lying for Money: How Legendary Frauds Reveal the Workings of Our World.  It dives in with great, colourful stories on all the different types of fraud and how they actually occurred.  

Nassim Nicholas Taleb of Black Swan fame commented on the book “if you want to lean to fend off fraud, read this.  And if you want to commit fraud… don’t.  But if you absolutely must, read this first!” 

I can assure you that I am reading it to find out what to look for in frauds and not as a how to guide. 

I usually steer clear of biographies of celebrities or musicians.  They are usually poorly written and aimed at the starry eyed fans who just want one more glimpse of their idols.   Lord help us if the celebrity actually wrote the book themselves.   

I was blown away by the quality of the writing in Dave Grohl’s autobiography The Story Teller.  Dave was the drummer in Nirvana is also the drummer, singer and nearly everything in Foo Fighters.  In his book, he’s a musical Forrest Gump who pops up to play drums with Tom Petty on Saturday Night Live or with punk icon Iggy Pop or maybe host a dinner with Sir Paul McCartney and ACDC. 

While the stories themselves were great, it is the way that he writes that sets the book apart.   It is both eloquent and thoughtful and he does a good job connecting with the reader.   Or maybe that is just the starry eyed fan in me.  90’s Alt rock is my jam.  Plus he has a soft spot for Canadians.  

As always, Keep the great questions coming. 

 

David Mudge, MBA. Portfolio Manager,

Canadian Focused Equity Portfolio

CIBC Private Wealth Management

David.Mudge@cibc.ca

 

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2021. David Mudge is a Portfolio Manager with CIBC Wood Gundy in Montreal. He/ and his clients may own securities mentioned in this column. The views of David Mudge do not necessarily reflect those of CIBC World Markets Inc. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.