Tax-reduction strategies don’t need to be complicated to work
Lou, 39, is curious about flow-through shares and other tax-enhanced investment options.
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Lou, 39, is curious about flow-through shares and other tax-enhanced investment options.
Q. I’ve done some research into tax-enhanced investment options, including corporate-class or swap-based funds, investments that pay a return of tax-free capital, flow-through shares, and life insurance strategies to help reduce taxes. When should someone consider these investment options and how do they determine which one is best for them?
– Lou
A. Lou, my first thought is don’t participate in any “tax-enhanced investment” options until you have maximized your RRSP* and TFSAs* and, if you have children, RESPs. Each one of these vehicles allows your money to grow tax-free, and each is relatively simple to participate in.
Compare the Best Savings Accounts in Canada* >
I’d also caution you not to invest in any “tax-enhanced investment option” until you’ve modelled it in financial planning software that accurately illustrates your current and future cash flow. (A financial planner can help.) This means a little work for you to get your numbers together, but once you do, you’ll be able to:
Using software to model the concept only may be misleading. Concept software is useful to simplify and explain a strategy, but it rarely gives the big picture, which is what you need to make a good decision. It is not uncommon for a tax strategy to look good in isolation, but not so good when future cash flows, taxes and lifestyle changes, are factored in.
When you’re initially thinking of “tax-enhanced investment options,” ask yourself these questions which I have organized around the four categories of accumulation (your working and earning years), decumulation (retirement), estate transfer and need.
Accumulation
Decumulation
Estate transfer
Need
Compare the Best Savings Accounts in Canada* >
Lou, I am going to stick with my original statement. See what you can do with RRSPs, TFSAs, and RESPs (if applicable) first, and then look toward tax-enhanced investments. I strongly encourage you to see how the strategy works using proper planning software with itemized cash flow projections. If you really feel you have a need for tax-enhanced investments, visit a financial planner, who can help to guide you through the investment selection process, which will be based on a number of things, including your stage of life, taxable income, and whether it is personal or corporate taxes you’re trying to save.
Allan Norman is a certified financial planner and Chartered Investment manager in Barrie, Ont. Allan can be reached at [email protected]
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc.
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