All right, I'll be the first to admit it. My life is a little onetracked.
Here's proof: My career is taxation, and my hobby is investing. Being one-tracked makes me good at what I do, but-according to my wife-something far less than exciting at the dinner table. In fact, my wife Carolyn and I were at a friend's place for dinner once when the conversation turned to investment issues. I was in my element. Evidently, everyone else wished they were in bed.
After dinner, Carolyn said to me privately: "Tim, for the first time in my life, I envied my feet-they were asleep.Why can't you take up another hobby, like insect collecting or something?"
"Insect collecting," I replied. "Great idea! I could liquidate some of my South American holdings, and reassess my short position in that small resource play out west to free up some cash. Then I could undertake a fundamental analysis on any insect-related securities that I can locate in the market. Of course, I'd want to check the price-volume histories and look at other technical analyses. Heck, I could even take a long position in some bug-related futures contracts through my broker in Chicago. Carolyn, you're a genius.We could make millions!"
"Help, I married a financial geek!" my wife replied. "Tim, forget what I said about starting a new hobby."
At this point, I want to talk to those of you who, like me, are investors. And this will include just about everyone. In fact, you can consider yourself an investor for our discussion here if you have any money at all invested outside your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or other tax-deferred plan-or if you expect to have these types of investments down the road. These are called non-registered assets, also referred to as your open money.
Let's look at some strategies that are sure to keep the tax collector away from your open money. It's time for investors to step up to the plate, because these pages contain some guaranteed home runs.
Tim's Tip 50: Consider the impact that taxes can have on a non-registered portfolio.
If the truth be known, Canadian investors, financial advisors, and money managers have not focused enough on the impact that taxes can have on your accumulation of wealth over the long run. Now, don't blame your financial advisor for not paying much attention to after-tax investing if in fact your advisor hasn't been concerned about the issue.
You see, there hasn't been much research on the issue of after-tax returns, so most advisors have not been fed the proper information on the subject. As for money managers in Canada today, most grew up in the pension industry where, quite frankly, income taxes don't matter (money in a pension fund isn't subject to taxes annually).
The bottom line? Canadian investors have not been shown that after-tax investing is critical to building wealth. But times are changing. Canadians are starting to recognize the impact taxes can have on a portfolio. I'm here to tell you that focusing on after-tax returns is so important when investing outside an RRSP or RRIF that it could mean the difference between having plenty in retirement, and moving in with the kids or performing on a street corner to make ends meet (and unless you're Bono, performing on a street corner is not likely to get you far).
There are two things in particular that will determine how much tax you pay annually on your non-registered investments: portfolio make-up and portfolio turnover.
Did You Know?
A recent survey by Stats Canada showed that 70 per cent of all investable wealth in Canada today is outside of RRSPs and RRIFs, where taxes can easily impact the growth of those assets. And don't forget, the next decade will see billions of dollars moving from one generation to the next here in Canada.
When money changes generations, it generally ends up in non-registered accounts since RRSP and RRIF assets rarely stay in those tax-deferred plans when moving to the hands of children or grandchildren.