Tax time is here! The most exciting time of year (just kidding). Remember, if you owe the government taxes make sure you file your return before the deadline to avoid paying late filing penalties.
It's a good habit to review your personal tax return each year and compare it with the previous year. It gives you an idea if you are paying more or less in taxes than the preceding year. This brings me to the next topic: tax efficiency for your portfolio. As a portfolio manager, part of what we do is create tax-efficient portfolios for our clients.
If you are an investor owning both registered and non-registered assets, there's a strategy you can deploy to reduce the tax liability of your portfolio. Fixed-income assets, such as bonds and GICs, pay interest and this type of income is fully taxable at the same rate as your employment income. This type of income is taxed at your highest marginal rate so it is best to invest these holdings into tax sheltering RRSP or RRIF accounts. On the other hand, stocks that pay dividends are taxed more favourably due to the Canadian dividend tax credit so investing in them outside of your registered account can be beneficial. You should attempt to hold most equities in your non-registered accounts because only half of the capital gain realized from selling the stock would be included in income. Also, if there is a loss on a position you are able to offset any gains in the previous three years. Of course, this isn't always practical as every investor's portfolio mix differs. Some people will have more invested in RRSPs and others will have more in non-registered accounts (i.e. corporate, joint or personal accounts) but tax-efficient asset allocation should always be considered.
Since we are on the topic of portfolios, let's talk about the management fees you pay and how they can help reduce your tax bill. Fees can be deducted against taxes if you pay for advice for buying or selling investments or to cover the cost of managing your investments in a non-registered portfolio. Fees charged for managing RRSP and TFSA assets, for example, are not tax deductible but fees paid on non-registered accounts are deductible against your income.
If Clint Eastwood gave you tax advice, the following would be the good, the bad and the ugly on fees. Those mutual fund fees you pay (but probably don't see) are "ugly" because they are not deductible against income. The "bad"? That goes to investors who are paying management fees but not deducting them on their tax return, not because they don't want to reduce their tax bill but because nobody ever told them to! The "good," of course, is paying management fees that are fully deductible and claiming them on your tax return. Paying an explicit monthly management fee is cheaper after tax in non-registered accounts than paying a hidden mutual fund MER.
Seeing clients save on fees and boost investment returns makes me happy. . . and it may even cause Clint Eastwood to crack a smile!
This year, many taxpayers will also have to complete the T1135 reporting requirement. This can apply to investors owning foreign investments in non-registered accounts that had a market value above $100,000 any time during 2014. This requirement also applies for assets such as real estate outside of Canada, bank accounts held abroad and debt or shares of foreign corporations.
Investing in a tax-efficient manner and filing your tax return can be a frustrating process, so I recommend you hire a tax professional.
Lori Pinkowski is a senior portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or [email protected]. You can also listen to her every Monday morning on CKNW at 8:40 a.m.
