Strategy: reducing the amount of tax you pay upon retirement

If you could change your taxable interest income into capital gains, would that save you tax?

If you could change your taxable interest income into capital gains, would that save you tax?

Interest income is usually taxed more than capital gains and since only 50 per cent of the capital gain is taxable, this could save you tax money on your return next year.

Dean from Parksville asked me how I can save him tax on his retirement income. Dean currently has $300,000 in bond mutual funds which pay interest income annually. A few years ago Dean had his investments in stock mutual funds that were taxed as capital gains, but switched them during the market downturn in 2008 and triggered a capital loss.

Since he is collecting interest income, he may not be able to trigger any capital losses, since capital gains usually come from holding equity or stock funds.

We discussed the retirement tax reduction strategy. Here is how it works.

Some Canadian mutual funds can re-characterize interest income as capital gains income through specific investment vehicles called corporate class funds. These corporate class funds are considered derivatives that invest in similar fashion that Dean’s bond funds do (in fixed income investments) except the income generated is classified as a capital gain, making them tax efficient for him.

The corporate class invests in bonds and fixed income vehicles while producing a return in capital gains through uniquely designed tax strategies.

There are several Canadian financial institutions offering these types of tax plans.

Now Dean’s income is taxed as a capital gain and since he has approximately $10,000 in capital losses, the first $10,000 of income from the corporate class funds will be not taxable to him since he can offset the capital gain income with his capital loss.

For Dean, the investments were of similar risk, return and costs, but now he will pay less tax and use up his capital losses without going back into stocks.

Will the retirement tax reduction strategy work for you?

Check with your advisor and tax professional about Canadian or global fixed income corporate class investments that are taxed as capital gains to lower your annual tax bill and possibly use up past capital losses on your tax return this year.

Prepared by: Grant W. Hicks RDB, C.I.M., FCSI, Investment funds advisor with Manulife Securities Investment Services Inc. in Parksville / Qualicum Beach. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. The views and opinions contained in this article are those of Grant W. Hicks and not Manulife Securities Investment Services Inc. Comments or questions Grant can be reached at 954-0247 or 1-866-954-0247. E-mail: grant@ghicks.com. Web: www.ghicks.com.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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