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the shrewd investor

Gail Bebee is a personal finance author and speaker.Tory Zimmerman/The Globe and Mail

Mention the word tax at this time of year and talk invariably turns to unfinished tax returns and the looming April 30 filing deadline. While filing last year's return may be top of mind, this year's tax return should also be on your radar screen. Now is the best time to take steps to minimize the tax you will owe for 2013.

Contributing to a tax free savings account (TFSA) is the No. 1 way for many taxpayers to keep Canada Revenue Agency's hands out of their pockets. For 2013, all adult Canadian residents can put $5,500 into a TFSA and pay no tax on the profits earned.

If you do not have a TFSA account or have not contributed the maximum amount in prior years, you can play catch up. The limit for previous years back to 2009 when the program launched is $5,000 per year. Making your contribution at the beginning of the calendar year will maximize the tax avoidance benefits.

The type of taxable income you receive can have a huge impact on your tax bill. Interest income and dividends from foreign stocks attract the highest tax rate. Dividends from many Canadian corporations and capital gains earnings are treated more favourably.

In Alberta, for example, the tax rate on a dollar of income between $43,561 and $87,123 could vary from 32 per cent on interest and foreign dividends to 16 per cent on capital gains or just under 10 per cent for eligible Canadian dividends. The tax rate differentials are similar in other provinces and the territories. Structuring your portfolio to hold the most highly taxed investments in a TFSA or RRSP should reduce the tax owing for the 2013 tax year.

In non-registered accounts, investing in quality stocks and holding them for the long term will defer the tax owed on any capital gains. This is because tax is due only when the stock is sold and a profit realized.

Another time-tested way to reduce taxes is splitting income with a family member. There are numerous opportunities available. For example:

– Contributions to an RESP grow tax-free until withdrawn, at which point the student beneficiary pays any tax owed, likely at a low rate.

– Contributions to a spousal RRSP will reduce the contributor's taxable income. In retirement, income will be split more evenly between spouses and could lower the total family tax bill.

– Lend money for investing purposes to a spouse in a lower tax bracket and the spouse pays the tax on any investing profits.

Taxpayers should note there are specific CRA rules to follow in order to benefit from a particular income-splitting strategy.

Buying financial products that are specifically designed for tax-efficiency is another route to reducing your tax bill.

T-Series mutual funds are of particular interest to investors seeking monthly income from non-registered investments. They pay out regular distributions that are return of capital (ROC). No tax is immediately payable, but accounting rules require investors to subtract the value of distributions from their original fund cost and pay tax once the adjusted cost base reaches zero. So, the tax bill is deferred and any taxable distributions are treated as capital gains which are taxed at half the rate of interest income.

T-series funds that are part of a corporate class structure have an additional tax advantage. Investors can switch between funds with differing mandates and avoid triggering capital gains and the associated tax bill.

Virtually all the major fund companies have T-series funds in their lineup. Due diligence prior to purchase is essential with particular focus on the funds' ability to generate profits that cover the advertised distribution rate.

By their nature, many exchange-traded funds are buy-and-hold investments and, as such, defer the tax bill on capital gains. A few ETFs are specifically designed for tax-efficiency. The iShares Advantaged series of ETFs uses forward agreements to recharacterize highly taxed distributions as lower taxed return of capital and capital gains. Horizons ETFs Management (Canada) Inc. offers swap-based ETFs that do not pay taxable distributions. Any tax owed is calculated at the capital gains rate and is due only when the shares are sold.

NexGen Financial Limited Partnership offers a group of innovative tax-efficient financial products. The firm's lineup of 14 corporate-class mutual funds includes fixed income, balanced and equity funds. Each fund is available in four different tax class versions:

1. Compound growth class: No distributions are issued. All profits are re-invested to compound tax-deferred returns.

2. Capital gains class: Annual distributions are all capital gains, which are taxed at half the rate of interest income.

3. Return of capital class: Monthly payouts are entirely return of capital with the previously noted tax-deferral benefits.

4. Dividend tax credit class: Monthly distributions are Canadian dividends which qualify for a dividend tax credit.

With this novel structure, an investor can choose the type of fund that meets her personal financial needs and reduces her tax bill. For example, a senior who needs regular cash flow and wants to keep her income below the Old Age Security clawback threshold could buy the return-of-capital class of a bond fund. When considering one of these funds, it is essential to weigh the return rate and other fund attributes against the anticipated tax benefits.

Now is the time to investigate and implement tax-saving strategies that suit your personal circumstances. Your reward for shouldering this task early in the year will be a smaller tax bill next April.

Gail Bebee is Canada's independent voice on personal finance and author of No Hype –The Straight Goods on Investing Your Money, a popular book of investing basics for Canadians from a financial industry outsider viewpoint. Through her writing, speaking and teaching, Gail shows people how to take control of their money and achieve their financial goals. Her column will appear monthly on the Financial Road Map site. Her website