Tax Efficient Investing

It’s not just about what you earn on your investments; it’s also about what you keep. By understanding the significance of after-tax returns and implementing tax-efficient strategies, you can enhance your investment outcomes, accumulate more wealth, and work towards your financial goals.

The Role of Tax Efficiency

Increased After-Tax Returns

Capital Preservation

Increased eligibility for threshold-based benefits

Enhanced Long-Term Performance

Our Approach

An often-overlooked component of portfolio construction is tax efficiency. Tax can significantly erode one’s overall investment returns.

We help our clients navigate the complexities of the tax landscape and implement effective investment allocation strategies. The first step in our process involves gaining an in-depth understanding of your financial situation. This understanding allows us to craft personalized investment plans that incorporate tax-efficient practices, specifically tailored for individuals, trusts and corporations. These plans include the use of tax efficient investment vehicles, asset location strategies, and careful consideration on the timing and types of investment income. Our goal is to optimize after-tax returns, increase eligibility for tax benefits, and provide our clients with peace of mind, knowing their investments are structured in a tax-efficient way.

Tax Efficient Investment Vehicles

There are several tax-advantaged accounts available to Canadians, including TFSAs, RRSPs, FHSAs, RESPs, and RDSPs. At Mahrt Investment Group, we strategically allocate your investments within these accounts based on your unique tax situation and the specific tax benefits offered by each account type. Our aim is to maximize the tax advantages provided by these accounts.

Asset Location

Asset location is a strategy we use to optimize the tax efficiency of your investments. While it would be great to have all your savings in tax-advantaged accounts like TFSAs and RRSPs, there are limits as to how much you can contribute. We review your investments and strive to place the ones that are less tax-efficient, meaning they generate more taxable income or attract a higher tax rate, in your tax-advantaged accounts. This helps shield or defer them from taxes. On the other hand, we strive to put the investments that are more tax-efficient, generating less taxable income or at a lower tax rate, in taxable accounts where the tax implications are lower.

Capital Gains

For individuals in higher tax brackets capital gains are the most tax-efficient form of income in Canada, which is why we place a strong emphasis on generating investment returns in this area. There are two key factors that contribute to the tax efficiency of capital gains: First, only 50% of the capital gain is included in taxable income, resulting in a significantly lower tax rate compared to regular, other income. While the top federal tax rate on interest can be as high as 33%, capital gains are taxed at just 16.50%. Secondly, unrealized capital gains benefit from a tax deferral, meaning you only pay taxes when the investment is sold, and a capital gain is realized. This deferral allows for the potential growth and compounding of investments without immediate taxation.

Tax Loss Harvesting

Tax loss harvesting is a strategy that involves capturing capital losses on certain assets to offset capital gains on other assets. The aim is to strategically reduce your tax liability. This strategy is particularly beneficial when you have realized significant capital gains during a tax year. By triggering capital losses on other assets, you can apply those losses to offset the capital gains, lowering your overall tax liability.

Investments in your Corporation

Investing within a corporation presents its own unique tax considerations. Corporations generating active business income attract a lower tax rate, which can provide more after-tax funds for investments. However, the types of income these investments generate – whether interest, Canadian dividends, foreign income, or capital gains – are subject to different tax treatments. Understanding the tax rates on each as well as the implications to your small business deduction and your notional account balances is critical for tax efficient investing. Our aim is to assist you in making informed decisions that align with your business and personal financial goals.