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Tax Strategies for Investors


xBy Allan Morse

To paraphrase an old saying: There are only two certainties we can count on in life: death and taxes. Although paying taxes is essential to fund public services, solutions to minimize the taxes we pay are always welcome. Here are some investment-related tax reduction strategies to consider:

Maximize RRSP
Contribute your maximum RRSP limit every year, at the beginning of the year. If you have any contribution carryforward room, make a point of catching up as soon as possible. Subject to foreign content restrictions, an RRSP is a very flexible and tax efficient way to save for retirement.

Review Asset Allocation of Portfolio
Review your entire portfolio (RRSP and non-RRSP) from a tax perspective. If your asset allocation strategy requires you to maintain a large fixed income component, generally try to hold the higher interest-paying investments inside your RRSP, and hold the more “tax-favoured” dividend or capital gains paying investments outside of your RRSP.

Time to put some of those coins aside for yourself!

Tax Loss Selling
If you have sold some assets and realized capital gains in the year, and you are holding other assets with unrealized losses, consider selling them as well. This will allow you to realize losses to offset the capital gains. This is often referred to as “tax loss selling.” The selling transaction must settle before the last business day of the year and you have to watch out for the “superficial loss rules” (e.g., do not repurchase the “losers” within 30 days before or after the sale).

Review Non-RRSP Investments
If generating income is your primary objective, review the tax-effectiveness of your non-RRSP investments. Consider how much you can receive tax-free if you have no other source of income (assuming year 2004 tax rates): Interest $8,000 or Canadian dividends $31,000 or capital gains $16,000. Provincial tax rates may differ and the resulting income levels may be lower in some provinces.

Income Splitting
Take advantage of any income splitting strategies which may be available to you, including spousal RRSPs, RESPs, splitting CPP with your spouse, and transferring assets to create capital gains in the hands of a minor child. But watch out for the rules regarding deemed dispositions and income attribution, and make sure to get professional assistance. These are just some of the strategies you can use to invest tax-efficiently. For more information, contact the office of your personal tax advisor and me. We can help you find the best solutions for your situation.

Allan Morse is a Senior Investment Advisor with CIBC Wood Gundy in Charlottetown, Prince Edward Island. Over his career he has focused on the importance of financial planning which he feels helps clients set clear, attainable goals. If you have any questions regarding this article or any issue regarding financial or investment planning, please Email Allan here.