If you are one of the minority of Canadians earning a six-figure income, congratulations. But there’s bad news, too: Chances are you pay more tax than you need to.
“Anyone in the top tax bracket should give consideration to doing everything they can to minimizing their tax liabilities legally,” said John DeGoey, a certified financial planner and investment adviser with Burgeonvest Bick Securities in Toronto.
After his client group of professionals and small business owners max out RRSP contributions, tax shelters are few and far between for, says Mr. DeGoey, who deals with clients who have a minimum of $250,000 to invest.
He points to flow-through shares as “the last really good way” for high income earners to minimize taxes. Flow-through shares allow investors to make tax-advantaged investments in companies involved in sectors such as mining, oil and gas, renewable energy and energy conservation.
Mr. DeGoey’s clients are expected to maximize their RRSP contributions first. That means the top marginal income tax rate really starts at $150,000, he said. “If you are earning $200,000, you can put $50,000 into your flow-through and save yourself about $23,000 in tax.”
Flow-through shares are a staple investment for Jane Haberbusch, an executive with Enbridge, and her husband, Glen Thorne, who holds a senior position with Cisco Systems. Both are clients of Mr. DeGoey’s in Toronto.
Ms. Haberbusch says her focus over the years has grown from building investments to also minimizing taxes. Flow-through shares have been “a good strategy” and will likely play a larger role in her investment plan as she exercises company stock options.
Tax savings shouldn’t determine one’s investing strategy exclusively, says Christian Strigl, an Edmonton-based portfolio manager with Macquarie Private Wealth. Mr. Strigl who works with professionals such as dentists and small business owners.
“Taxes are important, but one thing I was taught early on was that it would also have to be a worthwhile investment,” he says.
For clients who have sold their businesses, “preservation of capital and minimizing fees” are typically top of mind. These goals might be achieved through laddered bond portfolios complemented by other low-cost, low-risk investments.
The bulk of Mr. Strigl’s investors, however, are between ages 30 and 50 and are looking to maximize growth while minimizing tax. For them he typically chooses equities, either through direct ownership or low-cost mutual funds.
Mr. Strigl says he often deals with households in which one spouse is the primary breadwinner, and he is always surprised how few take advantage of spousal RRSPs. “A lot of people simply aren’t aware of them,” he said. “It is income splitting as well as a form of tax planning. You don’t want one spouse with a massive RRSP and the other spouse has nothing when it comes time to retire.”
When it comes to taxes, not all investment income is treated equally. Dividend income is taxed the least, while at the other end of the scale interest income is treated about the same as regular income.
Investments can be rearranged to create tax advantage, says Adrian Mastracci, a portfolio manager with KCM Wealth Management in Vancouver.
“In most cases you can find some very simple things by just reorganizing the kind of income they are bringing in, by putting certain investments into RRSPs and shifting higher-taxed investments to the lower-income spouse,” says Mr. Mastracci.
Inflation expectations should also figure into investment and retirement calculations, says Mr. Mastracci. His firm assumes base inflation of 2 per cent a year, which will likely affect retirement income more than living expenses. “In retirement, chances are you have a house mortgage-free and chances are you are going to be downsizing if anything,” he says.
Mr. Mastracci’s advises speaking to your adviser to improve your ability to preserve capital. “Are you paying too much tax? Get them to do some number crunching for you. You are paying a fee one way or another, but get your money’s worth.”
KEEP YOUR MONEY
John DeGoey of Burgeonvest Bick Securities recommends these rules for building wealth and keeping fees to a minimum:
Diversify: Use low-cost products and pay no more than .55 per cent in fees.
Ask about fees: Look for an adviser with “scalable” fees – one who offers a volume discount for assets above a certain level. Fees on non-registered accounts are tax deductible.
Ask about taxes:Investors in the top tax bracket ($128,000 and up) should consider buying flow-through shares and/or flow-through limited partnerships, which offer tax deductions similar to those of RRSPs.
Trade less: The best tax is a tax that is deferred until many years down the road.