Pattie Lovett-Reid: Tax consequences of investment decisions
Life can throw you a curve ball when you least expect it, and according to Natixis Global Asset Management, paying taxes ranks at the top of the list of unpleasantness.
Forty-one per cent of those surveyed said paying taxes is the worst. Going to the dentist ranked up there at 33 per cent, getting the car fixed (15 per cent) and filing paperwork for a mortgage (11 per cent).
I'm not entirely sure I would rank paying taxes as one of my life's most unpleasant surprises, but I do like the fact investors are thinking about taxes and their investments, with 79 per cent saying they have considered the tax consequences of their investment decisions.
Yet there is still confusion.
Forty-one per cent say taxes and advisor fees have a similar impact on the investment returns, with 32 per cent believing taxes have a bigger impact and 27 per cent saying advisor fees have the bigger impact. Depending on your situation, it’s likely taxes are going to erode your investment returns more so than advisor fees if you haven't managed those investments well.
This speaks to the lack of real understanding of the current taxation climate. Forty-six per cent say they have never had a chat about how to be a tax-savvy investor. Those that did found the most popular plan or vehicle to use was a registered account, such as an RRSP, RESP, TFSA, followed by managing the type of investment income earned, income-splitting with family members and charitable contributions.
Taxes on investment income can prove to be very costly – interest income attracts the highest tax. On average in Canada, for every $1 earned in interest or foreign income, about 50 cents goes to the government in tax.
The dividends tax rate means on average 35 cents goes to the government for every $1 paid. Capital gains at the current 50-per-cent inclusion rate means on average 25 cents in tax is levied for every $1 in capital gains. The only money you really care about is the money you get to keep in your pocket, so paying close attention to tax in a portfolio allows the investor to build wealth.
If your advisor isn't talking to you about the tax consequences of your investment portfolio, it might be time to shop around. Your portfolio could be getting a double hit – with higher taxes and management fees. If you are paying management fees, you want to ensure you are getting the service you deserve and that means assistance with tax planning.