Many of you have heard of tax efficient investing, but what does it really mean for you and your portfolio?
Today we will discuss different types of investors and what benefit is gained by tax efficiency. Seniors are one group that can benefit by possibly preventing clawbacks — every dollar of interest income is taxed at your marginal tax rate and structuring your income to include dividends, capital gains or return of capital can reduce the amount of income that is added to your tax return, thereby reducing the amount of OAS clawback that may apply.
One of the methods to accomplish this is by investing in corporate class mutual funds; corporate funds offer benefits that should not be ignored.
You can switch between various asset classes within the fund family without triggering a capital gain. If a taxable distribution is paid on a corporate fund, it will either be an ordinary dividend or a capital gains dividend (which is taxed as a capital gain), both of which are taxed favourably in Canada.
Active investors can create more turnover in their portfolios, this can trigger tax events that results in less money to reinvest.
Clients wishing an income portfolio that creates a regular, tax efficient cash flow stream in retirement can also benefit from corporate class funds. Many corporate funds have a “T-series” option; this allows a regular stream of cash flow in the form of return of capital. This is a return of your own capital and allows you to separate the capital from the growth in the investment.
Return of capital (roc) is not taxable when received and will drive down your cost base on the specific investment. This results in a higher capital gain deferred into the future and your portfolio can continue to grow, as all the shares remain intact when roc is paid.
Incorporated business owners may accumulate after-tax profits in their corporations which can then be invested. Corporate tax rates on “passive” investment income is fairly high, and, subject to investment objectives and time horizon, corporate assets that are invested with a focus on minimizing taxable distributions and generating capital gains by using corporate class funds are further ahead.
Philanthropic clients who plan to donate to charity can use corporate funds with T series to create a tax efficient cash flow in retirement while establishing an effective charitable giving strategy. As the payment of ROC drives down the investment cost over time, they become perfect for an in-kind charitable donation.
By planning ahead, the investor can receive multiple benefits: a donation tax credit, elimination of capital gains liabilities on the in-kind donation and tax is minimized on the accumulation of capital thereby maximizing the amount available to charity.
RRSPs, RRIFs and TFSAs have built in tax benefits, corporate funds are best used in non-registered accounts. You may benefit from corporate funds, talk to your advisor and you may start keeping more money in your hands.
For further information, Carol Plaisier, CFPÆ, Investment Advisor with DWM Securities Inc. and Insurance Advisor with Dundee Insurance Agency Ltd., can be reached at the DundeeWealth office in Parksville (250) 248-2399, or by email: firstname.lastname@example.org,
This article was prepared by Carol Plaisier, CFPÆ, FMA, AMP (Accredited Mortgage Professional) who is an Investment Advisor with DWM Securities Inc. This is not an official publication of DWM Securities Inc. and the views (including any recommendations) expressed in this article are those of the author alone, and they have not been approved by, and are not necessarily those of DWM Securities Inc.