For most of the bear cycle in mining stocks during the past decade, financial advisors have had the ability to lower their clients’ tax bills by triggering a capital loss. But things have changed as mining stocks have been on a tear since gold became a haven at the start of the COVID-19 pandemic – and advisors who serve Canadians invested in the mining sector should consider how to manage the windfall strategically.
Mining is a cyclical sector. It generates a lot of wealth for many people – including the jobs it creates in financial hubs like Toronto and Vancouver and the remote communities where the mines themselves are located. But along with the highs come the lows, and for investors, it’s important to be protected during these times of uncertainty.
There are several ways to ensure this “boom and bust” cycle doesn’t creep into investors’ personal lives, and that involves some planning to even out the market fluctuations. By following a disciplined approach, advisors can ensure their clients participate when mining stocks are performing well while protecting against the uncertainty and stress the mining sector can yield.
Advisors can start these conversations with clients by reviewing investments made during a mining boom period and focus on minimizing the tax consequences and maximizing the timing of their investments.
On the tax front, start by looking for opportunities in your clients’ tax returns. Oftentimes, it can be possible to reduce the tax bill to as low as 13 per cent from as high as 54 per cent. To do that, there are several strategies to consider.
One is charitable giving. Advisors should ask their clients if they want to be intentional and generous with their philanthropy, and plan strategically for their donation to have the desired impact. Then, there are contributions to tax-sheltered, registered plans. Clients who maximize their contributions to registered retirement savings plans, registered education savings plans, and tax-free savings accounts can lower their tax bills significantly on sales of stocks, options exercise, and bonus payments.
Finally, companies in the mining and energy sectors can provide the tax-based financing incentive known as flow-through shares, which they issue to finance project development. By making these shares available, a mining company can transfer its expenses to investors, which can result in a tax credit against their income of as high as 100 per cent.
Then, there are a few more strategies available for those who work in the mining sector. For high-income earners who work with multiple companies, there may be an opportunity to invoice their employers through a consulting company, which could lower their tax rate down to 13 per cent in Ontario.
The key to making this strategy work is saving and investing the proceeds of employment inside their consulting company. From there, investing in insurance can be another great tax shelter. It allows incorporated professionals to use corporate after-tax dollars to pay for insurance premiums. This can be a cost-effective strategy to withdraw cash from a consulting company tax-free.
In contrast, for high-income-earning mining professionals who are employees and receive an annual T4, advisors will need to look for strategic opportunities to lower their income tax and investment income.
Specifically, advisors could determine if these investors’ assets should go into a joint account with their spouse to split investment income and plan for future estate distribution; a family trust for creditor protection and income-splitting opportunities; or be set up as a spousal loan, which allows the lower-income-earning spouse to pay taxes on investment income for a prescribed interest rate of only 1 per cent.
Once the structure is set up and as tax-smart as possible, making recommendations based on a client’s risk tolerance, investment objectives and tax situation should be the next step.
Given the cyclicality of the mining sector, it’s important to take profits when the situation is favourable for mining stocks. Investing outside of the mining sector is a core strategy to help clients who invest and work in the mining sector to achieve their long-term goals and protect their hard-earned money from market risk.
Advisors are then able to track the progress toward achieving their clients’ goals and rebalance regularly to lock in profits.
Ultimately, mining investors should participate in the upside of the market, but be well protected from market risk, with the goal of enhancing investment and retirement income to ensure a comfortable lifestyle in the long run.
A well-diversified investment portfolio has been proven to accomplish those goals. This year, especially, investors in the mining sector are in a unique position. Advisors should ensure they take advantage of it while they can.
Alexandra Horwood is director, wealth management, portfolio manager, and investment advisor at Richardson Wealth Ltd. in Toronto.