Your Investment Portfolio:
Investments
are essential to everyone thinking about there future, or looking at their
financial situation. Anyone looking
at their investments should consider three tax major considerations when
purchasing or selling your investments.
Before
we start keep a couple of points in your head.
First you should always consider more than one avenue (i.e. real estate,
stocks, GICs, bonds, income funds, savings accounts, etc), when you are looking
at investments, have a diverse portfolio that will have guarantees and will have
the right amount of risk that you are able to take.
Next, know where your money is going.
There are many financial planners out there if the one your currently
have is not full filling your needs then find a different one that will.
Finally, you should always plan to the end.
Many investors start savings or investments and do not know how long or
for what they are going to use the money for.
When you have money you need to manage that money and that means knowing
when you want to pull out the money and for what reason you are saving the money
for. To say that you are saving for
retirement is not good enough these days. Be
specific, example: “I am saving for retirement fund, to have residual income
of $750 a month from the age of 60 onwards.”
Now you know and can plan for how much you NEED to put away.
To
begin the lesson on taxation understands what you have first.
By understanding what you have you are going to be able to tell where
your investments fall under the Canadian tax laws.
80% of people have a combination of income trusts/mutual funds, savings
accounts, bonds, and GICs. Select
members will direct there own savings and investments such as stocks, income
trusts, and select investments. Canadian
tax laws states that every investment falls under different categories these
categories have different taxation rules behind them.
For example certain investments mainly stocks will be taxed at 50% of the
capital gains, where as the large majority of income trusts will be give tax
deduction capability allowing you to deduct it from your income (Income
Trusts). Income
trust can generally avoid paying ordinary income tax by paying (or making
payable) all of its taxable income (including net realized capital gains) to
unit holders, thus avoiding a layer of taxation associated with corporate
entities. RRSP’s will be deducted from your overall income, and then the
remaining amount will be taxed at regular tax rates.
RESP’s are tax-free and deductible on your income also but they must
remain in your child’s portfolio until the age of 18 when they will be given
access to there funds. Life
insurance portfolios are just tax-free shelters; they do not provide you much in
immediate assistance on your taxable situation but in the long run are very
beneficial when you are withdrawing funds.
GIC’s and savings accounts are the worst possible investment tools as
they add to you income and get taxed at normal income tax rates.
Now depending on what is going to be the best
situation for you as there are limitations to the amount of deductions or the
amount of tax-fee dividends that you receive. Be aware of where your current
investments fall under consult a tax professional and see if you can purchase
investments in other areas to reduce your tax bill for the upcoming year.
Secondly,
you should know where your investments are purchased. A fair majority of Canadians have a very large portfolio of
investments in the United States. Many
of these investments are part of their stocks, or bonds, also other areas that
you should look into is where your mortgage is located currently if you are not
with a major banking institution, and if you have been traveling to the states
for over half the year. You may
have become or are considered a non-resident of Canada; this will greatly affect
how your investments are taxed. You
may even owe another country taxes when you don’t even live there.
The key factors are, if over 80% of your money are located in the United
States or if you have traveled over 185 days out of a year to the United States,
you may be considered a non-resident. Non-residents
are taxed at far greater rates than regular Canadian Citizens, unless you wish
to give up your right of residents in Canada which case you are only allowed to
spend a maximum of 185 days on Canadian territory.
Know where you stand!
Finally,
you should ALWAYS get a second option on your investment portfolio from a tax
professional. Financial Advisers have largely been protected against second-guessing because of
the way their business works. Most advisers want to sell you investments and
take a commission, or manage your investments and take a fee equivalent to 1 or
2 per cent of your assets. They're simply not set up to charge people for a two-
or three-hour consultation on their financial situation.
They have concerns, but they're reluctant to go to another financial
adviser for a second opinion because they fear that there will be sales
pressure, or they feel the opinion will be unfairly critical of what is a
reasonably good portfolio Where as if you go to a professional tax consultant
you can have them work with your financial advisor work together to reduce the
amount of taxes that you may pay during the selection process of your
investments. Also you will be able
to understand in more detail as to where your investments are going and where
they are going to end when you want to start withdrawing your funds.
It will also be advised to look over a detail exit strategy for your
investments, so that you will know how you are going to be taxed when you start
drawing your funds and how they will support your current life style.
A
second option on your investments is highly suggested from our tax consultants.
You need to know what you have, how you will be taxed on your
investments, and what situation you currently fall into.
This will help you understand what you need to do to obtain your goals. Large majority of tax professionals and financial advisors
will usually provide you with a free consultation at first.
If you need constant consultation then you might have to pay.
But the large majority of tax professionals will usually only charge a
very minimal amount. There are many
tax professionals out there that can help you out.