- Estate Planning
- About Us
August 31, 2012
Written by: Chris Karram
It is very common to be frustrated as a Canadians when you get your annual tax return only to realize exactly how much you paid in tax the year before. The question for anyone in the above category then is to determine if there are ways to minimize or defer your annual investment income taxes indefinitely. Thankfully, there is.
That means no T3 or T5 slip, no additional annual taxes, and possibly no OAS claw back.
Most mutual fund companies have built a unique mutual fund structure that works as a tax preferred investment vehicle. By taking advantage of this unique opportunity, Canadians have the chance to invest their non-registered savings or investments into a vehicle that has the potential to avoid incurring taxes on the growth they earn on an annual basis. That means no T3 or T5 slip, no additional annual taxes, and possibly no OAS claw back.
These types of mutual funds, often referred to as “Corporate Class Mutual Funds”, are structured as corporations, rather than traditional mutual fund trusts. This enables investors to make investment decisions without being affected by tax concerns, and benefit from tax deferral and increased compound growth over the long term.
There are three primary benefits to investing your non-registered money in one of these types of vehicles.
The first is that you are able make switches within these specific funds without triggering capital gains or losses. In fact, a taxable event occurs only when an you redeem your capital and growth from the corporation. This means that you can rebalance your holdings in line with the appropriate asset classes as you age, and you will not incur a new tax bill every time you do so.
The second benefit is that you are able to defer taxable income arising from your funds and stop annual taxation due to T3’s and T5’s. In fact, capital gains and losses can be timed to minimize taxes. For those enjoying their retirement, this can play a substantial role in removing the risk of an OAS claw back which can increase taxes payable from 46.41% for someone in the highest tax bracket to a whopping 58% annually. That alone can provide a substantial tax savings each and every year.
The third primary benefit is that you are able to convert interest income in the portfolio to tax-efficient capital gains; the taxable event only occurs when you redeem assets from your funds. That is again a very substantial benefit because most capital gains investments are equity based meaning that your risk level must be high in order to take advantage of a the lower taxes associated with capital gains. Because your interest and dividend income can be converted to capital gains, you are able to invest in money market and income based funds and significantly minimize or possibly even eliminate your risk factor all together.
If you were to invest $25,000 and earn an annualized return of 8% over 10 years, you would have a total portfolio of $38,958 inside of a traditional non-registered mutual fund, or a total of $53,973 if you invested that same amount into this structure. That’s a whopping $15,015 difference, or a 39% increase!
This strategy was created for the small and large investor alike. It’s not complex and walks, talks and looks like a traditional mutual fund, but with a series of additional benefits. Ideally, this structure is specifically suited to investors with a non-registered portfolio that is not tax preferred, investors that are losing their OAS pension due to high investment income, or investors who are wishing to take advantage of income splitting opportunities. Additionally, this opportunity can be owned either personally or corporately, whichever makes the most sense for you and your particular situation.
Chris Karram is a Founding Principal and Senior Financial Consultant with SAFEBRIDGE Financial Group. His firm specializes in helping their clients decrease their taxes, increase and protect their assets, and convert or eliminate their mortgage debt. Chris can be reached at 416.466.5858 or email@example.com. This article is for information purposes only and should not be considered as personal investment, tax or pension advice.
Sign Up our newsletter today to get notify about latest updates !