First-quarter earnings season is well underway in North America, and results have been largely positive. High-quality, high-yield Canadian stocks are again reporting numbers that strongly recommend their ability to cushion stock market corrections and help you build wealth over the long term. Canadian Edge subscribers can catch up on the latest batch of quarterly numbers from Portfolio Holdings in today’s Flash Alert.

Although the market has sold off in recent days, responding to short-term economic, currency and oil inventory data and a corresponding flight from the commodity complex, the long-term factors driving Canada’s rise to global economic prominence remain in place. Job growth north of the border is robust, rankings from Bloomberg Markets confirm the strength of the financial system and demand for oil from emerging markets continues to grow.

Canada recently elected a Conservative majority to its House of Commons and guaranteed Prime Minister Stephen Harper four years in power. Fiscal policy will remain on its current trajectory, pointed toward budget balance by the middle of the decade. And Bank of Canada Governor Mark Carney recently stated that monetary policy would be dictated by where inflation is relative to a 2 percent target, not the relative strength of the loonie versus the US dollar.

Most important, CE Portfolio companies continue to perform on the ground. Cineplex Inc (TSX: CGX, OTC: CGXPF), for instance, announced a 3 percent dividend increase this week, despite the fact that box office was down 18 percent in the first quarter. What made the difference for Cineplex, which runs 1,300 screens across Canada is the dominant player in the movie exhibition space–was management’s concerted effort to diversify.

Management recently announced the acquisition of arcade game supplier New Way Sales Games Ltd, yet another small but consequential move that allows Cineplex to grab more of theater attendees’ entertainment dollar. The company is adding IMAX and 3D capability at a rapid clip, an effort that will result in higher-margin screenings. These are the kinds of things that mitigate the impact of a slump in Hollywood and slower ticket sales.

Cineplex is just the latest income-trust-turned-corporation to boost its dividend. As if any more were needed, this is further confirmation that the hysterics who called the Halloween Massacre the “death knell” for high-yield investing in Canada were indeed consumed by emotion rather than focused on data. Favorable global trends–including inexorable demand for resources–put Canada at the crossroads of developed and emerging economies.

The good news is companies such as Cineplex make the high-quality, high-yield Canada story accessible to individual investors.

The Big Six

One group we follow with great interest but that isn’t represented in the CE Portfolio is Canada’s Big Six banks. The Big Six were well represented in Bloomberg Markets’ ranking of the world’s strongest banks. Bloomberg scored on five criteria: the ratio of Tier 1 capital to risk-weighted assets; nonperforming assets to total assets; loan-loss reserves to nonperforming assets; deposits to funding; and efficiency, measured on a costs-to-revenue basis.

National Bank of Canada (TSX: NA, OTC: NTIOF), the smallest of and most recent addition to the Big Six, is third-strongest bank in the world. Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) is No. 4. Toronto-Dominion Bank (TSX: TD, NYSE: TD, No. 12), Royal Bank of Canada (TSX: RY, NYSE: RY, No. 17) and Bank of Montreal (TSX: BMO, NYSE: BMO, No. 19) also made the top 20.

Only Bank of Nova Scotia (TSX: BNS, NYSE: BNS), our favorite, was on the outside looking in among Canada’s Big Six. Three American banks–Fifth Third Bancorp (NSDQ: FITB, No. 7), JPMorgan Chase (NYSE: JPM, No. 14) and Citigroup (NYSE: C, No. 16)–made the rankings. The safest bank in the world, according to Bloomberg Markets, is Singapore-based Oversea-Chinese Banking Corp Ltd (Singapore: OCBC, OTC: OVCHF).

Several of Canada’s Big Six banks have felt good enough about their positions relative to the US during the loonie’s now nearly decade-long flight that they’ve accelerated south-of-the-border expansion plans. But one is now rumored to be seeking buyers for at least some of its US assets, as in these cases items such as bad mortgages can’t be moved as easily as an RV. TD, Royal Bank and BMO are still struggling with recent US acquisitions, mostly at the retail level.

Scotiabank’s international expansion plan is focused on emerging markets in Latin America and Southeast Asia. These markets aren’t as mature, by definition, as the US, but neither are they overloaded with debt-heavy consumers. All the Big Six enjoy relatively healthy domestic consumer banking foundations; we like Scotiabank’s calculated risk-taking abroad in Latin America and Southeast Asia as a complement more than other banks’ efforts to grow in the US.

A couple have become bottom-heavy, as it were, by rapidly growing their American branches–to the degree that TD now has more south of the border than it does in Canada–and this has left them with considerable legacy exposure to the lingering subprime meltdown. Terms of a couple deals involve a certain amount of risk-sharing with US government agencies, but the fact remains these capital deployments could hinder dividend growth.

A report from Moody’s Investor Service on American banks lends further evidence to the case that Canadian banks are better than their US counterparts right now. According to Moody’s, “Despite some improvements in asset quality trends and capital levels, the tepid economic recovery coupled with limited job growth undermine the likelihood of a return to normalcy by putting pressure on home prices, consumption, and investment.”

Meanwhile, Statistics Canada reported last week that the labor market bounced back from a March contraction with 58,300 jobs created in April, bringing full-time employment back to levels last seen at the beginning of the recession. Canada’s unemployment rate declined to 7.6 percent from 7.7 percent in March. The labor force grew by 47,400, and the participation rate–the share of the population in the labor force–increased to 67 percent from 66.9 percent.

The two most important factors in banks’ health are employment and the housing market. Because we’ve returned to a world where you can’t buy a home without a job, that criterion seems to be of slightly greater significance right now; jobs simply come before houses. Right now Canada is doing that at a healthy pace. We favor Scotiabank because it enjoys all as well as strong growth prospects in Asia and Latin America while avoiding most of what ails the US.

Bank of Montreal kicks off fiscal second-quarter reporting season for the Big Six on May 25. CIBC, TD and National Bank report May 26, Royal is up May 27 and Scotiabank, which boosted its dividend effective with the April payment and currently yields 3.6 percent, brings matters to a close on May 31. We’ll have news as it happens, particularly for what it says about the durability of the long-term wealth-building story in Canada.

The Roundup

Over the past year we’ve advised CE subscribers to use a letter from a US Treasury official explaining the legal consequences of the Fifth Protocol to the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, what we commonly refer to as the US-Canada tax treaty.

The basic principal of this and all other treaties like it is to eliminate or reduce double taxation. The US-Canada agreement is particularly clear about its aims to achieve a level of reciprocity on taxation befitting the largest bilateral trade relationship in the world. The so-called Karzon Letter explains that distributions or dividends paid by Canadian income trusts that have either become tax-paying SIFTs (specified investment flow-through) or tax-paying corporations in respect of units or shares held in US IRA accounts should no longer be subject to withholding.

There is no objection to the substance of the law. There is, however, considerable trouble when it comes to enforcement–as in, there is no institutional will to do right by US investors who hold still-standing trusts and converted corporations in IRA accounts. Certain brokerages, Fidelity, notably, are taking the extra step to help high-value clients, but these efforts have not yet resulted in a coordinated effort, for example, by Schwab, E*Trade and other biggies to work with Canadian-side clearing agents and Revenue Canada to make it easy for people to enjoy what is rightfully theirs.

The grassroots letter-writing effort has therefore achieved limited results. As a means of explaining again what remains an alternative and at the same time lighting a fire that may finally reach what should be responsible authorities, here’s a (lightly) abridged version of the process non-residents of Canada can go through to get amounts improperly withheld on the Canadian side of the border back, via the Canada Revenue Agency (CRA) Form NR7-R:

• Only you, as the “beneficial owner,” are entitled to refund, with limited exceptions.
• Where tax was remitted to the CRA in Canadian currency, you must enter the “Refund applied for” in Canadian currency. The CRA will then issue only a Canadian currency refund. You may need to contact the Canadian payer or agent to confirm the remittance currency.
• The CRA will issue refunds in a foreign currency only if the tax was remitted in that same foreign currency. If it approves a refund in foreign funds, it will use the exchange rate that applies on the date we issue the refund check. As a result, the amount refunded may be different from the amount remitted.
• You must verify the “Tax payable” rate to ensure it agrees with the rate provided under Section 212 of the Income Tax Act or with the relevant tax treaty rate provided within Information Circular 76-12R5 (or later) based on the non-resident’s country of residence at the time of payment.
• For security payments, such as dividends or interest, CRA requires one (1) NR7-R application per payable date, per income type, per beneficial owner, per CUSIP number, per Canadian payer or agent’s non-resident tax account number.
• The CRA only issues current year refunds to clients for security payments that flowed through custodians or nominees. Otherwise, you may request a current year refund directly from the Canadian payer or agent where an NR4 slip or Canadian tax slip hasn’t yet been issued.
• The CRA doesn’t issue refunds for less than $2.00.

Emphasis mine. You’re also required to provide a detailed reason for requesting the refund.

• You must provide details of payment and tax withheld.
• You must provide the appropriate “Reason for refund” and any relevant exemption number for the beneficial owner.
• Where there are third-party participants, such as a custodian, the CRA requires a notarized affidavit of beneficial ownership linking the custodian and beneficial owner. The affidavit must include: the name of the beneficial owner of the security, the name of the custodian, the number of units held by the custodian, the name of the security, the payable date of the security and the notary or lawyer’s seal and signature.
• Where there are third party participants, such as a custodian, the CRA also requires a notarized affidavit of registered ownership linking the custodian and the beneficial owner. The affidavit must include: the name of the beneficial owner of the security, the name of the custodian, the number of units held by the custodian, the name of the security, the payable date of the security and the notary or lawyer’s seal and signature.
• If the transaction flowed through the Depository Trust Company (DTC) in the US, an authorized DTC Statement, specifically a Final Detail Report, CSH SDFS Settlement Stmt Div. or Dividend Cash Settlement Items List, are mandatory substitutions for the “affidavit of registered ownership.”

Original, signed NR7-R applications with all required documentation must be sent to the CRA no later than two years after the end of the calendar year in which the non-resident tax was remitted. The address is: International Tax Services Office, Non-Resident Withholding Division, Station T, PO Box 9769, Ottawa ON K1G 3Y4 Canada.

You can reach the CRA’s International Tax Services Office at 1-800-267-3395 (within Canada and the US) or 613-952-2344 (outside North America). You can also fax your applications to 613-941-6905.

What individual investors are asked to do is enforce the law on their own, and it’s a complex, time-consuming process that many simply can’t afford. It’s a joke that they’re put in this position.

Following are reporting dates for Portfolio Holdings yet to be reviewed; check out the May Portfolio Update for a breakdown of results for Acadian Timber Corp (TSX: ADN, OTC: ACAZF), AltaGas Ltd (TSX: ALA, OTC: ATGFF), Colabor Group Inc (TSX: GCL, OTC: COLFF),  Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE) and Yellow Media Inc (TSX: YLO, OTC: YLWPF).

Atlantic Power Corp (TSX: ATP, NYSE: AT), Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), Cineplex Inc (TSX: CGX, OTC: CPXGF), Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF),  EnerCare Inc (TSX: ECI, OTC: CSUWF), Keyera Corp (TSX: KEY, OTC: KEYUF), Newalta Corp (TSX: NAL, OTC: NWLTF),  Parkland Fuel Corp (TSX: PKI, OTC: PKIUF), Peyto Exploration & Development Corp’s (TSX: PEY, OTC: PEYUF), Provident Energy Ltd (TSX: PVE, NYSE: PVX) and Vermilion Energy Inc (TSX: VET, OTC: VEMTF)  are covered in today’s Flash Alert.

Stay tuned to Flash Alerts for more first-quarter updates.

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–Jun. 9 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 19 (estimate)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 30 (confirmed)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF)–May 20 (estimate)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–May 13 (confirmed)
• PHX Energy Services Corp (TSX: PHX, OTC: PHXHF)–May 20 (estimate)

Conservative Holdings

• Artis REIT (TSX: AX-U, OTC: ARESF)–May 18 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 25 (estimate)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–May 12 (confirmed)
• Capstone Infrastructure Corp/Macquarie Infrastructure Corp (TSX: CSE, OTC: MCQPF)–Jun. 9 (confirmed)
• Extendicare REIT (TSX: EXE-U, OTC: EXETF)–Jun. 7 (confirmed)
• IBI Group Inc (TSX: IBG, OTC: IBIBF)–Jun. 1 (confirmed)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)– Jun. 7 (confirmed)
• Just Energy Group Inc (TSX: JE, OTC: JSTEF)–May 19 (confirmed)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–Jun. 14 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF)–May 20 (estimate)
• RioCan REIT (TSX: REI-U, OTC: RIOCF)–May 19 (confirmed)
• TransForce (TSX: TFI, OTC: TFIFF)–May 17 (confirmed)