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Tax-planning ideas to net better investment returns

Tax-planning ideas to net better investment returns

April 2, 2015

Today we have some suggestions on how to search for significantly better investment returns.

Most investors are return driven. Everyone always wants to know the return on investment.

What did the manager of that particular mutual fund earn last year or over the past five years? What is a reasonable expectation of what they will earn in the future?

Investment firms understand this and promote a higher earning potential with their various investment products. You’ll see slogans like “Come and invest in one of our tax-free savings account and it will offer a higher than the normal interest rate for the next few months.”

Mutual fund companies advertise their funds that had the best return during the past number of years because they know that investors are looking for high returns.

Why would that mutual fund company advertise one of their funds that had less attractive returns when the one thing investors are looking for is that great return?

In today’s column we have a hot tip. An investment idea that could increase your return by 20, 30 or even 40 per cent.

There’s more, we can pretty well guarantee this return on investment. On a scale of 1 to 10 I hope that sounds like something close to a 10.

Our hot tip can be put under the heading of Tax Planning. Another word to describe the strategy is Asset Location.

It is fairly simple and if used correctly can greatly enhance your after-tax investment returns. Here is how it works.

Assume you earned a taxable 6 per cent on an investment held within your investment account. The taxes you pay on that 6-per-cent return are paid to the government at a rate that depends on your full taxable income.

For example if you paid income tax at the rate of 20, 30 or 40 per cent that is the amount of tax that would be charged on your investment return. A better way is to own that investment in a Tax-Free Savings Account.

All investments held within a Tax-Free Savings Account are tax free; therefore the simple task of changing the location of where you own the investment can have significant income tax savings.

Any income tax savings means your after-tax return is higher. For many Canadians that is the greatest source of increasing their after-tax investment returns.

Asset Location is the decision of where in your investment portfolio should a particular investment be located. Failure to take advantage of this simple tax-planning technique is a mistake that most investors make.

As an investor, the most important goal is not just the return on investment it is the after-tax return on investment. The after-tax return can be greatly enhanced by how you structure your portfolio.

As a general rule bonds and other fixed income investments should be held within your registered retirement savings plan because interest income is fully taxable.

Stock investments are usually held in a non-registered investment account because of the favourable tax treatment on dividends and capital gains.

A little tax planning that incorporates Asset Location can increase your after-tax return by 20, 30 or 40 per cent depending on your tax bracket.

April is when most people are filing their income tax. It is a good time to do a little tax planning that will increase your after-tax returns for the years ahead.