Want to have more money in your pocket? Making the right investment choices is not the only way to accomplish that goal. Tax planning is also a major part of a well-developed financial plan.
Too often, people overlook prudent tax-saving strategies. And without a proper tax plan, life – and death too, for that matter – can get mighty expensive, says Adam Watson, portfolio manager and investment advisor with the JMRD Watson Wealth Management Team at National Bank Financial Ltd. in Chatham, Ont.
As an example, Mr. Watson points to an Angus Reid survey that found half of Canadians have no will and testament in place. That can cost a bundle in taxes.
There is no one-size-fits-all solution, but smart tax planning starts with some key considerations. Mr. Watson shared some of them in a recent interview.
How essential is tax planning to a person’s wealth management strategy?
Mr. Watson: It’s an extremely important component of any income strategy. If you’re not careful, it can work against your other planning segments – like having fixed income in the wrong account or not optimizing the timing or the amount of registered plan contributions and withdrawals.
So, it’s critical to have all of your planning working in conjunction with tax planning. The taxman is going to be there no matter what. It’s just a question of developing the right strategy to determine how much the tax authorities receive.
What are some factors that can affect which tax-efficient strategies to employ?
The first is simply looking at your income now versus what you expect to have in retirement. Consider what tax bracket you fall into now versus the one you will be in then. Also, do you have a pension? Is there anything that could change your income down the road? Tax planning is a case-by-case situation. There are lots of commonalities, but everyone is going to have different situations and goals.
In looking for tax strategies that would apply across the board, is the tried-and-true registered retirement savings plan still one of the most effective?
Since the advent of tax-free savings accounts, RRSPs have lost favour. Everyone wants the flexibility of being able to have their funds readily available and not having them locked in with taxes to pay upon withdrawal. This sentiment has increased significantly with the pandemic.
Still, RRSPs have their place. Especially as, with a TFSA, you have to pay the taxes on those funds today instead of later. In many cases, you’re likely to be in a lower tax bracket in retirement, so RRSPs still make a great deal of sense.
What is one of the more overlooked tax-savings strategies?
Donating shares. People are often unaware of the benefits. If you have an investment that you’ve held for, say, 20 years, it may have a sizeable capital gain. If you’re a charitable person, you can donate some or all of those shares. You get a tax deduction for the full amount and make the capital gain no longer taxable, without triggering the capital gain upon donation.
Why is this better than a cash donation?
This is a way to double your benefit. The donation is made with pre-tax dollars when donating the investment in kind, removing a future source of income tax owing. Alternatively, a cash donation is made with after-tax dollars only.
We spend a lot of time trying to educate clients about this option. It’s a tool that wasn’t on the radar five years ago for clients. But it has become more prevalent with my high-net worth clients, and the concept is expanding to more clients every year.
For those HNW individuals, what are the tax-related or financial tools they tend to employ more often? Maybe ones that anyone should use?
Estate planning is definitely a tool that high-net worth individuals use more than the average individual. To me, a will should be a part of any financial and tax planning strategy.
Typically, high-net worth individuals may be more likely to have a corporation or a holding company. They’re also more likely to use insurance in their financial plans. They may have the means to do spousal RRSP contributions and spousal loans, which are not average tools for the majority of individuals.
The more tools you employ, the more complicated the estate, financial and tax planning becomes. So, definitely get an expert to help and quarterback this kind of financial planning with your legal and accounting professionals. Our team has great success working with our clients’ other professionals.
Building a portfolio has various tax implications. When looking at potential investments, what should you weigh from a tax standpoint?
Capital gains, dividends and interest are all taxed differently. They’re more or less advantageous in certain accounts and will help minimize the taxes you’ll pay on your potential earnings. But it’s important to make sure you’re invested in the right vehicle for your situation. It’s about finding that right mix of potential income with the potential tax consequences within your risk tolerance to reach your goals.
Adam Watson is a portfolio manager and investment advisor with JMRD Watson Wealth Management Team at National Bank Financial Ltd., specializing in wealth management. He graduated from Wilfrid Laurier University with a bachelor of business administration (BBA). He holds the chartered investment manager (CIM) and personal financial planner designations (PFP) and is a fellow of the Canadian Securities Institute (FCSI). In 2020, he was a nominee for the Investment Industry Association of Canada (IIAC) Top 40 Under 40. Learn more about his practice here.
Advertising feature produced by Globe Content Studio with National Bank. The Globe’s editorial department was not involved.