This article is not devoted to exploring the “make more” path, as that highway splinters off into innumerable different avenues for debate. Active vs. passive management, investment philosophy, and asset allocation to name a few. Instead, investors can follow a more certain path to keeping more by focusing their attention on exploring how they can “save more” in their investment portfolio.
To effectively save more (or pay less), investors need to scrutinize the costs embedded in their investment portfolio which are dragging down how much they actually take home at the end of the day. There are two primary costs creating the biggest headwinds; taxes and management/advisor fees. Admittedly the solution seems simple, once you find that cost effective portfolio that offers you tax-advantaged investing you will have completed your journey of finally keeping more. Unfortunately, things are never just that easy; cheap investments are some of the worst tax offenders, while tax-efficient portfolios often come at a cost premium.
Investors are now left with a choice, should they invest in cheaper, more tax punitive investments or should they opt for slightly more expensive alternatives that offer attractive tax savings? As a wise accountant once said “it depends...” – factors such as investment time horizon, incremental cost, and tax brackets are all important to consider in determining whether a tax-efficient investment is worth the additional cost.
Consider the following scenario to help clarify.
An Ontario investor (top rate tax payer) is considering investing $1 million in their non-registered account. They are debating between two portfolios targeting a 5% annual rate of return. The characteristics of the two portfolios are detailed below:
|Tax Efficient Portfolio||Cost Effective Portfolio|
|Management Fee||1.20%||Management Fee||0.07%|
|Capital Gains||0%||Capital Gains||1%|
|Interest Income||0%||Interest Income||2%|
|Eligible Dividends||0%||Eligible Dividends||1%|
|Capital Appreciation||5%||Capital Appreciation||1%|
|Expected Annual Return||5%||Expected Annual Return||5%|
Despite the higher cost, this tax-efficient compound growth investment outperforms its lower cost competitor. In fact, the cost of the tax-efficient portfolio could rise as high as 1.55% before the lower cost alternative would begin to pull ahead as the optimal alternative. By selectively using tax-advantaged investments this Canadian investor was able to keep more.
Contact your financial professional to learn how a tax-efficient compound growth portfolio can help maximize your after-tax returns.
Compound Growth tax class: Generally, should not make taxable distributions. However, a mutual fund may be required to make taxable distributions to investors in a tax class for which a distribution or type of distribution is not optimal or in accordance with their tax preference. There is no assurance the Compound Growth tax class will achieve its objective and not effect a taxable distribution.
Tax liabilities on investment income and capital gains earned by a mutual fund cannot be mitigated nor can they be fully managed in all circumstances. Therefore, a mutual fund may be required to make taxable distributions to investors in a tax class for which a distribution or type of distribution is not optimal or in accordance with their tax preference.
The illustration and case study presented are for informational and educational purposes only and should not be construed as legal, tax or investment advice. Information contained here is believed to be accurate and reliable at the date of production, however, Fiera Investments LP cannot guarantee that such information is complete or accurate or that it will remain current. The information is subject to change without notice and Fiera Investments LP cannot be held liable for the use of or reliance upon the information contained here.
Fiera Investments LP does not provide tax, accounting, regulatory, or legal advice to its clients. All investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment.