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Craig Senyk is portfolio manager at Mawer Investment Management in Calgary and manager of the Mawer Tax Effective Balanced Fund.

Craig Senyk's job is to make sure his firm's clients invest their money in the most tax-effective way possible. Mr. Senyk is a portfolio manager at Mawer Investment Management in Calgary and manager of the Mawer Tax Effective Balanced Fund.

So it's surprising to hear him caution investors against making decisions based solely on tax considerations – allowing the tax tail to wag the investment dog.

"It may sound funny coming from us, but we've long been advocates for investors focusing on after-tax returns," Mr. Senyk said in an interview. After all, "you can't have a high after-tax return without a high pre-tax return," he quips.

He points to the example of the dividend tax credit on Canadian stocks, which he worries "may be biasing Canadian investors to be overweight Canadian equities." This would have hurt investors in 2014, when the Canadian stock market was one of the weakest in the world.

Kurt Rosentreter agrees. As author of four books on tax-efficient investment, Mr. Rosentreter, a chartered accountant and investment adviser at Manulife Securities in Toronto, is aware of investors' distate for taxation.

"Canadians hate taxes more than they love investing," Mr. Rosentreter said. "This causes them to make decisions that are more focused on taxation than smart investing."

Mr. Senyk looks at how little difference the dividend tax credit can make, and how costly it can be for those Canadian investors who sacrifice returns in order to maximize it.

Take the 2014 dividend yield on the three major stock benchmarks: the S&P/TSX composite index yielded 2.9 per cent; the Standard & Poor's 500 stock index, 1.9 per cent; and the MSCI World index, 2.4 per cent.

"We believe you should have equal weighting in these three markets," Mr. Senyk says. The Canadian market had the highest yield both before and after tax.

Yet the difference in how much yield went to tax pales in comparison to the difference in returns: 0.9 percentage points of the TSX yield went to tax, 0.9 points of the U.S. yield and 1.1 points of the MSCI World yield, Mr. Senyk says. "So you pay 20 points more in tax on the MSCI World index."

Now compare the returns. The S&P/TSX returned 10.6 per cent for 2014, the S&P 500 yielded 23.9 per cent and the MSCI World, 14.4 per cent.

"So if you're paying attention only to tax, you might have saved 20 basis points in tax but you lost 400 points in pre-tax return," Mr. Senyk says. "It's like getting a deal on eyeglass frames and getting the wrong prescription."

If the past year wasn't lesson enough, the big drop in Canadian energy shares last month, and along with them the Canadian dollar, further underlines the risk of home-market bias. The Canadian market is heavily weighted in financial, energy and commodity stocks.

Instead, investors should start by making sure their portfolios are structured properly, with interest-bearing investments in registered plans and tax-advantaged ones in taxable accounts.

"Ask yourself, 'Would I still invest in this security if the tax advantages weren't available?'" Mr. Senyk says.

His second question: "Am I taking on additional risk in order to avoid paying tax?" If you follow this through, are you not selling something because you don't want to pay capital gains? Mawer, for example, doesn't allow any security to grow to more than 6 per cent of a portfolio.

"Some investors have a single stock at 10 per cent, 15 per cent, 20 per cent of the portfolio, but they don't want to sell it because they don't want to pay the tax," Mr. Senyk says. "If that security is dependent on oil and gas prices, it could turn down pretty quickly."

Perhaps the most egregious example of tax tail wagging the investment dog was labour-sponsored funds, which gave investors a tax credit only to lose them a bundle of money.

Mr. Rosentreter agrees. "People ate them up only to find their investments dwindled to nothing over 10 years," he says. "They were a disaster."

Oil and gas flow-through shares are another example, he says. The securities appeal to people who are in a high tax bracket because they can earn up to a 100-per-cent tax writeoff in the first year. Often, though, the share price falls rather than rises when the hoped-for oil and gas fails to materialize.

"They're very popular among affluent Canadians, but if the investment goes down 50 to 60 per cent in value, you lose more than you got in tax breaks," Mr. Rosentreter says. Even so, "some executives can't get enough of them."

In the end, having a properly diversified portfolio that earns superior returns is more important than tax considerations, advisers say. As well, taking some profits on the high fliers and investing them in areas that have been beaten down will keep your portfolio in balance.

"We do want investors to be paying attention to tax considerations," Mr. Senyk says, but they should pay even more attention to their pre-tax return.

"It's very easy to not pay taxes," he says. "Just find securities that go down and you'll have capital losses to your heart's content."

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