Tax planning is an indispensable part of your investment strategy. You cannot avoid paying taxes, but what you can do is use every legal measure at your disposal to reduce your tax liability. Wealth advisors use a variety of tax-efficient investment strategies to help their clients maximize their net returns. As Robert Kiyosaki once said, “It’s not what you make, it’s what you keep.” Here, we will look at four of the most popular strategies to help you keep more of your investment returns.
Have Different Investment Accounts: Taxable and Tax-Advantaged Accounts
One effective strategy is to diversify the types of accounts you hold. By using a combination of account types, you can mix and match income sources to help minimize your taxes. For example, you could choose between tax-free savings accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). The income in TFSAs is entirely tax-free while RRSPs is tax-deferred. In addition, your contributions to your RRSP are tax-deductible, so you can use them to reduce your annual tax obligation.
How Do Tax-Smart Investors Decide Where to Invest Money?
Being a tax-smart investor involves placing your money across a balanced mix of taxable and non-taxable accounts, as the example above illustrates. Taxable accounts include brokerage accounts, which are good for investments that tend to lose less of their returns to taxes. Tax-advantaged accounts include RRSPs and TFSAs – although each of these offers a different set of benefits. RRSPs offer short-term tax benefits, as the contributions are tax-deductible, while TFSAs render better long-term results because, even though the contributions are not tax-deductible, the accounts themselves are not taxed.
In Canada, the Income Tax Act identifies different types of investment income and applies different taxation to each. The trick is to allocate the right investments to the right accounts in line with your goals and financial profile. Your tax or wealth advisor can help you decide on the right spread.
Capital losses provide an effective way to reduce your tax liability. However, as an investor, you need to take care of how you time acquisitions, sales and reacquisitions. If you should trigger a superficial loss, you will not be able to claim that loss to lower your tax bill. A superficial loss occurs when you sell a capital property at a loss and then you or a person affiliated with you acquires that property or an identical one within 30 days before and 30 days after the original sale. In this case, you cannot attempt to offset your capital gains as a result of the loss on the initial sale. Instead, the loss is added to the adjusted cost base (ACB) of that property. To avoid triggering a superficial loss, you could ensure that you repurchase the relevant asset only once 30 days have elapsed after the original sale. You could also purchase an identical asset at least 31 days before you sell the one you intend to claim against, or simply ensure that you do not own the asset on the 30th day after you have concluded the sale.
Employ Tax-Loss Harvesting
You can use your investment losses to your advantage. They can offset your gains and reduce your tax liability. This is a technique called tax-loss harvesting. If your losses should exceed your gains, you can offset up to $3,000 of taxable income each year. Tax-loss harvesting is a strategy used by many investors, but it is best to do it in consultation with a tax advisor to ensure that the rules are properly observed and the sale of stocks and bonds is timed correctly.
Momentum Financial Services is a boutique financial planning and tax planning firm based in Georgetown, ON. Our expertise, knowledge, and experience allow us to assess the needs of your portfolio and make the adjustments needed to maximize your returns and reduce your tax liability. We provide excellent high-net-worth wealth management services for individuals and families. Contact us to find out more about our services and what they can do for you.
