Become a smarter investor

The tax deadline is only days away and it’s now time to switch gears from tax preparation for 2007 to tax planning for 2008. The best way to be a smarter investor is to be smarter when it comes to tax. Tax smart investing is not always easy because rules can be complicated and always changing. Remember that making good tax decisions is just as important than making good investment decisions. Tax smart investing is about doing both. Here are some Top tax ideas for a smarter investment portfolio:

1. Watch different forms of Investment Income. There are three basic types of investment income – capital gains, dividends and interest Income. The least tax efficient income is interest income. Buying fixed income investments has certain safety and income benefits, but they typically lack in tax benefits.

Capital gains and dividend income are tax preferred over interest income particularly for non-registered investments. Understanding the type of investment income from your investment can go a long way in getting the tax advantage.

2. Mutual Fund Corporations. Most mutual funds in Canada are structured as a trust as opposed to a corporation. With respect to taxes, the advantage to a corporate structure is the ability to allocate investment income among the different corporate classes and also defer investment income when switching from fund to fund. There are even corporate structured bond funds that minimize interest income for conservative investors. Instead of holding GICs outside the RRSP, consider holding corporate class bond funds instead as a tax smart strategy.

3. Maximize interest income in RRSPs and TFSAs. Remember that tax applies to growth of investments held in a non-registered portfolio. As a result, it is sometimes beneficial to keep interest income in tax-sheltered plans like RRSPs and tax free plans like Tax Free Savings Accounts (TFSA) and keep tax efficient income like Capital gains and dividends in the non-registered portfolio.

4. Use Tax-Free Savings Accounts (TFSA) instead of non-registered plans. With the introduction of the TFSAs, there is no benefit to holding money in non-registered accounts over the TFSA. Unfortunately the TFSA limits you to $5000 per year of contribution.

5. Tax Loss Selling. In investing, you are supposed to buy low, sell high. Invariably, every investor will lose money on his or her investments from time to time. When this happens, investors can employ the tax loss selling strategy where you use write off these losses against capital gains which defers capital gains into the future. Tax loss selling is simply a tax strategy to minimize capital gains from other sources. Capital losses can be used back three years or forward indefinitely.

6. Avoid investing at year-end. If you are thinking of putting some money away into investments but not into RRSPs, think twice. You may be better off waiting until January. For example if you buy a GIC, you can defer the interest you pay by a full year simply by waiting a month. You are required to report the accruing interest income annually in the year in which the anniversary falls. If you are thinking about buying a mutual fund, you might be better off waiting until January to avoid the taxable distribution.

7. Buy and Hold Strategy. Buy and hold is not only a common investment strategy preached by financial experts but it can also be a tax smart investment strategy to defer investment income. Basically everytime you buy and sell something, you can potentially trigger a disposition and therefore may subject yourself to tax. If you buy and hold, you won’t pay tax until you sell.

Remember again, the old saying “It’s not what you make that count’s, it’s what you keep that counts most”

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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