As I mentioned before, there are 2 major things where you can save money and increase your investment yield at the same time: Controlling your management fees and decrease your taxes. Since it is a major concern for most Canadian, I decided to outline a few strategies that would help decreasing your tax burden.
Maximize your RRSP / 401k/ IRA account
The very first thing to do with investment when you are looking to pay fewer taxes is to look for tax shelters. You need to find places where you can defer your tax payment as long as possible. Registered Savings Plans are perfect for this strategy since you will not be taxed until you withdraw from those accounts.
More aggressive and less aggressive
There are 3 different incomes when it comes to taxes in Canada: Interest income, dividend income and capital gains. As a rule of thumb I say that you are paying 50% tax on interest income, 33% on dividend income and 25% on capital gains. You obviously pay a smaller tax rate but it comes down to the same thing: interest incomes are highly taxable.
This is why you should determine only one investment profile but have different profile depending if you invest in a registered or non registered account. The most important part is that your global portfolio reflects your risk tolerance. By managing your investment according to their taxable properties, you will increase the amount of fixed income within your RRSP and put your more aggressive investment outside your RRSP (they should generate capital gains and dividend income).
One last point to consider is that capital losses can not be reported within registered account. Therefore, you can’t offset your gains.
Corporate Class Funds and TFSA
The corporate class funds and the Tax Free Savings Account are very similar except that you will defer taxes for a while with the CC funds and you will never pay taxes on your investment held in the TFSA. The thing is that you can only put 5K per year in the TFSA. So once your contribution is maxed, you should turn around and consider the CC funds. I suggest you read the following posts on the Corporate Class Funds in order to see if there are suitable investments for your situation:
Search for low turnover rate
If you go the mutual funds route, I suggest you look for fund managers preferring the buy and hold strategy. Capital gain taxes are triggered upon a sell transaction. If you hold your stocks for several years, you will defer taxes until you actually sell them. This will definitely help you pay fewer taxes on your overall portfolio.
As you can see, there is no magic to be made when it comes down to pay the government’s bill. However, there are still ways where you can postpone your tax payment and therefore enjoy a better investment return on your investments.
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