The next time you speak to your advisor ask them if they are managing your assets in a tax efficient manner. Managing taxes is the single most important factor having the greatest impact on your net investment returns. When it comes to taxes we employ two strategies in portfolio construction: “house holding of assets” and “direct ownership”. It's not every advisor's job, preference or business model to do the work required to be as tax efficient as possible. So find out if you are taking advantage of either strategy.
House Holding
It's a process where we carefully allocate different investments classes to different accounts. For example, if your Investment Policy Statement stated you hold 80% equities and 20% fixed income and you had $865,000 over the following accounts;
- $450,000 RSP
- $65,000 TFSA
- $350,000 Non-Registered
Where would it be most tax efficient to hold your stocks and ETFs as opposed to your fixed income? Remember interest income, dividend income and capital gains income are all taxed differently. So one needs to consider the impact of investment allocation carefully. And there is a logical and rudimentary process to follow that is clearly explained in all introductory wealth management material. The question is are you taking advantage of this process?
Direct Ownership
That's when you have title to your investments. Now this may sound straight forward but let me explain. When you own stocks, you have direct ownership of those securities. When you own a mutual fund or some pooled investments you own units of the fund, not the holdings with in the fund or pool. And with direct ownership you and your advisor are in a better position to make investment buy and sell decision to maximize your growth and minimize your taxes each year. That ability is hindered if you don’t. One such instance is the fact that mutual funds lock in capital losses that are generated inside the fund. They are not passed on to investments like capital gains are.
If you want to learn more about how mutual funds lock in capital losses that cannot be used to offset future capital gains or want a more detailed explanation on House Holding of accounts, contact me directly at 604.961.8525 or on email at mike.bensimhon@rbc.com.
