Consider Making Investments More Tax Efficient

Just as investments benefit from compounded growth over time, the associated taxes on income and gains can accumulate to become significant. Recall the different ways that investment income is taxed in non-registered accounts. Interest income is fully taxable at the investor’s marginal rate. Capital gains are taxed at half of this rate, since only half of the capital gain is taxable. Eligible dividend income from Canadian corporations generally attracts a tax rate somewhere in between the two. How much of a difference can this make? The table illustrates four scenarios (A to D), each involving an investment of $88,000 in Year 0 and a rate of return of 6 percent annually compounded over 25 years. In A and B, tax is paid each year at different rates based on the type of income earned: interest and dividends. In C, taxes are deferred so there is no annual tax, but tax is paid at year 25 when capital gains are realized. In D, there is no tax; funds grow in a Tax-Free Savings Account (TFSA). After 25 years, the difference in the after-tax value is significant. As such, it is prudent to consider making investments more tax efficient, where possible. In brief, here are a handful of ideas:

1. Fully maximize tax-efficient accounts. Don’t overlook the benefits of tax-free and tax-deferred growth through TFSAs and RRSPs.
2. Optimize asset location. Different types of income may be taxed differently based on the type of account the income is generated from. By consolidating assets, a comprehensive view can help to better optimize asset location across all accounts while maintaining a balanced allocation.
3. Consider tax-efficient investing alternatives. Some types of investments have tax-advantaged attributes. Mutual funds, REITs, limited partnerships and others may provide return of capital (ROC) distributions that are not a taxable receipt. With increased interest in Guaranteed Investment Certificates (GICs), some investors have considered high-quality bonds trading at a discount, which have both an income and more favourably taxed capital gains component.
4. Explore other tools. There may be other tools that can help defer tax, such as an individual pension plan (IPP) that allows business owners/ executives tax-deferred contributions to build retirement income. Those looking to pass a company to the next generation may use an estate freeze to lock in the tax liability at death based on today’s business value.

For a deeper discussion, or for more ideas, please contact the office.

The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. ©️ 2023, Wellington-Altus Private Wealth Inc. ALL RIGHTS RESERVED. NO USE OR REPRODUCTION WITHOUT PERMISSION