Q – I am a 60 year old male and make $120,000 annually. I am looking for a way to shield as much tax as possible while allowing my investments to grow. What structure do you recommend? – Ted Y., Stratford, Ontario
A – If you have maximized your Registered Retirement Saving Plan (RRSP) and your Tax Free Savings Account (TFSA), then you might want to consider tax-advantaged mutual funds.
The first step is to determine if a tax-advantaged mutual fund fits into your investment objectives and risk tolerance. In a typical actively managed mutual fund, a portfolio manager will buy and sell securities in an attempt to make profits for unitholders. Capital gains and losses are attributed back to the investor, and taxes are paid.
Tax-advantaged mutual funds, on the other hand, are geared to limit capital gain distributions through a low turnover strategy. When portfolio managers deploy this strategy, they buy and hold securities to help minimize tax. By not continually buying and selling holdings, the manager is not triggering capital gains that are attributable back to the investor.
The manager must also be able to successfully manage cash inflow and outflows, carry forward capital and operating losses, crystallize gains, and manage the Capital Gain Refund Mechanism (CGRM), which is a complex tax provision in the Income Tax Act.
A few other tax-efficient options to look at are index funds, capital structure, and tax-efficient systematic withdrawal plans. Regardless of the particulars of each fund, it is important to remember that tax is a secondary consideration. Your focus should remain on the suitability of the investment. I recommended consulting with a Certified Financial Planner (CFP) to create a comprehensive financial plan, have your accountant review the recommendations, and create a long-term plan targeted to minimize tax. – R.T.