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K N O W L E D G E B U R E A U I N C . , A L L R I G H T S R E S E R V E D

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HOW INVESTORS EARN INCOME FROM CAPITAL

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consequences.


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Module Content – Instructions for Use:

Step 1: Watch the Online Lecture

View the audio-visual presentation for this module by logging in online. The online lecture will open in a new

window (or tab). It may take up a minute for the presentation to load, depending on your connection speed, so

please be patient.

Step 2: Read the Knowledge E-Journal

Review the online E-Journal for this module.

Step 3: Take the CE Quiz

Take the CE Quiz online. A mark of 60% is required to pass the module.

A make-up Quiz is available for this module, if required.

On successful completion of the module:

Print your certificates


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Instructor Name,

EVELYN JACKS

PRESIDENT, KNOWLEDGE BUREAU

Evelyn is one of Canada’s most respected educators in tax and

financial literacy and a prolific financial author. She has penned 52

best-selling books on tax preparation and tax-efficient family

wealth management. She has twice been named one of Canada’s

Top 25 Women of Influence.

Evelyn is also the founder and president of Knowledge Bureau,

Canada’s leading national post-secondary educational institute for continuing professional

development in tax and financial services. Knowledge Bureau is the publisher of certificate

courses leading to the prestigious Master Financial Advisor (MFA) and Distinguished Financial

Advisor (DFA): Tax and Bookkeeping Services designations, providing core specialization

opportunities in tax, retirement, business succession and estate planning for multi-disciplinary

practices.

Evelyn has been influential in advising governments on tax and financial literacy policies. She was

appointed by former Finance Minister Flaherty to the Federal Task Force on Financial Literacy

and by the Premier of Manitoba to the Lower Tax Commission to advise on the direction of the

provincial tax regime. Recently, she co-founded the Manitoba Financial Literacy Forum in

partnership with the Manitoba Securities Commission, dedicated to increase financial literacy in

that province.


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H O W I N V E S T O R S E A R N I N C O M E F R O M C A P I T A L

Lesson Plan:

Online Lecture 20 minutes

Knowledge Journal 30 Minutes

CE Quiz 10 minutes

Key Concepts and Issues – What you will learn:

The student will understand the difference between income from property and other sources of

income, how the manner in which investors earn income affects the taxation of that income, the

net after-tax dollars available for investing, and ultimately the family’s ability to accumulate tax-

efficient capital over the long term. The student will also have a basic awareness of the tax issues

that arise when investment income is earned, and later disposed of.

New Skills to be Mastered:

The student will understand how tax efficiency contributes to the ability to grow more income in the

present so that the family can build capital to secure the opportunity to future income sources. The

student will identify the alternatives open to investors when making decisions regarding which

investments to participate in, what order those investments should be made in and how to identify the

major tools to be used in planning for investment income.

Reading Guide – Key Questions to be Answered:

1. What are the definitions of acronyms used in tax efficient investing?

2. How does a Real Wealth Management (RWM) strategy help investors plan for more income and

capital?

3. What is tax efficient investing?

4. What key categories are used to analyze asset mixes?

5. What four principles are used in deploying a tax strategy?

6. What are the four key elements of a tax return?

7. What are the six rules for tax efficient investing?

8. What are the ten tax tactics in tax efficient investing?

9. How do you integrate tax strategies with investment decision-making?


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Learning Activities:

To test the learning process, the student will answer FIVE multiple-choice questions and contemplate the

role of the advisor and insurance solutions, as required.


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H O W I N V E S T O R S E A R N I N C O M E F R O M C A P I T A L

Table of Acronyms

Acronym Meaning

ACB Adjusted Cost Base: used in calculating capital gains or losses

CCA Capital Cost Allowance: a deduction for depreciation of income-producing assets

CESG Canada Education Savings Grant: an amount of up to $500 given to those who

contribute to Registered Education Savings Plans for their children

CPI Consumer Price Index: used in the calculation of indexing of tax provisions

CPP Canada Pension Plan: a contributions-based public pension benefit system

CRA Canada Revenue Agency: formerly Revenue Canada

CSB Canada Savings Bonds: A fixed rate interest-bearing investment backed by the

Canadian government

CTB Child Tax Benefit: a refundable credit paid monthly to parents of children under 19.

The benefit consists of two portions; the Canada Child Tax Benefit (CCTB) and the

National Child Benefit (NCB). The amount of the benefits depends on the number

and age of the children. Each benefit is clawed back at different income levels

EI Employment Insurance: a premium-based public insurance program for those who

lose their source of employment income through no fault of their own

GIC Guaranteed Investment Certificate: an interest bearing investment

GST Goods and Services Tax: a federal tax on goods and services purchased in Canada

GSTC Goods and Services Tax Credit: a refundable tax credit for low income families to

offset the Goods and Services Tax

HBP Home Buyer’s Plan: a plan to allow individuals to borrow from their RRSPs to assist in

a home purchase

HST Harmonized Sales Tax: a single tax which incorporates the federal GST and a

provincial sales tax

LLP Lifelong Learning Plan: a plan to allow individuals to borrow from their RRSPs to

assist in full-time education


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Table of Acronyms

LSIF Labour-Sponsored Investment Fund: an investment fund which is registered federally

and/or with a province and qualifies for the Labour-Sponsored Funds Tax Credit

LSFTC Labour-Sponsored Funds Tax Credit: a non-refundable tax credit for investments in a

Labour-Sponsored Funds. This credit will be phase out by 2017.

MTR Marginal Tax Rate: the tax rate that will be applied to the next dollar of income

earned. For accuracy, we often include in this rate the federal and provincial taxes

and surtaxes as well as the clawback of refundable and non-refundable credits as a

result of the additional dollar of income.

NR Non-refundable: a credit that will reduce taxes payable, but will be lost if the credit

exceeds the taxes. A refundable credit, by contrast, will be paid to the taxpayer if the

credit exceeds taxes payable.

OAS Old Age Security: a non-contributory government pension for Canadians who are 65

or older. OAS may be deferred by up to 5 years for a larger pension. OAS begins to

be clawed back when income exceeds a certain threshold

PRPP Pooled Retirement Pension Plans. A new retirement vehicle, introduced in November

2011 to provide a registered savings opportunity for small companies and their

employees who do not have access to RPPs.

RDSP Registered Disability Savings Plan: a registered plan within which funds can be

accumulated to provide a private pension option for the disabled.

RESP Registered Education Savings Plan: a registered plan for accumulating funds for a

child’s education. Contributions to such a plan may qualify for the CESG.

RPP Registered Pension Plan: a private pension plan funded by the employer and/or

employee which is registered and qualifies for a tax deduction.

RRIF Registered Retirement Income Fund: a registered fund which provides for the

payment of an increasing portion of the funds in the plan each year until the taxpayer

turns 93, after which each year’s payment is 20% of the remaining funds.

RRSP Registered Retirement Savings Plan: a contribution based savings plan where

contribution limits are based on earned income (to a pre-defined limit). Contributions

to the plan are tax deductible, income earned within the plan is not taxed until

withdrawn, and funds withdrawn from the plan are taxed as ordinary income.

WITB Working Income Tax Benefit is a refundable credit calculated as 20% of earned

income in excess of $3,000. Several provinces have variations.


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Tax efficient investing, the name implies that there is a specific way to invest capital with the goal to

reduce taxes payable in the short term and over a lifetime for individuals, as well as their family units.

By definition: tax efficient investing is the process of taking advantage of tax rules (often called tax

preferences) so as to pay the least amount of taxes on income, and accumulate the most after-tax

wealth for the family over time.

Tax efficient investment planning is aimed at making the best use of available tax rules to shift income,

where permitted, amongst family members and, in so doing, reduce taxes for the family unit as a

whole. That helps families create more “surplus income” and save more money for the future. Done

well, an effective tax strategy will also temper tax erosion later on in accumulated capital pools, now

held in several family members’ hands.

The first goal is to direct taxable income into the hands of each family member, thereby using the

progressive nature of the tax system — that is, all the tax credits and deductions you are entitled to as

a family unit--to average down tax burdens for the family as a whole.

When you invest with the best tax outcomes in mind, you will not only save money on your actual tax

bill each year, but can also increase cash available from social benefits, like the Old Age Security,

refundable tax credits, GST or provincial tax credits, non-refundable tax credits, or spousal or tuition

and education amounts. All these potential savings can improve cash flow, overall return on

investment and available capital for re-investment.

But tax efficient investing can reap even more benefits. Provincial user fees that are based on income

may be decreased, if income is properly managed. Retirement income will grow, and quarterly

instalment payments can increase. Capital can be transitioned, intact for future generations to enjoy.

However, there are principles, rules, and tactics to be deployed as active income is earned, that can

significantly optimize the creation of wealth over the long term. These require investing in a tax

efficient order, at the right time. The time value of money is also a significant factor, so the more you

invest, sooner, on a tax efficient basis, the more capital you’ll accumulate over your lifetime.

Real Wealth Management: Planning for Tax-Efficient Income and Capital

How does a Real Wealth Management strategy help investors plan for tax efficient income and capital? Let’s

begin with the end in mind: investors who accumulate enough money in savings are in a position to create

future income. When you grow, preserve, and then properly transition that capital, through tax efficiency,

sustainable family wealth is created. This is defined as having “enough” for now and the future, in order to:

• Continue to support both needs and wants in the event of a change: career, divorce, disability, death.

• Continue to provide family with similar income and life style after you die.


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• Achieve peace of mind. While your ambitions may be to continue to grow personally, professionally

and financially, you are at peace when you know that your current wealth is sustainable over a long

period of time and will cover future income needs.

Integrating Tax Strategy into a RWM Process

Recall that a Real Wealth Management process requires the following client-centric process;

• Discuss client trigger questions first

• Do a financial assessment (personal net worth statement, check prior filed tax returns and

any financial plans)

• Use tax strategies to project pre- and post-retirement income needs

• Integrate a strategy focused on accumulation, growth, preservation & transition of wealth.

• Make joint decisions in selecting solutions.

When we can properly anticipate current and future income needs, we are ready to develop the tax

efficient strategies and timelines for getting results in building capital.

Initiate the process by preparing and/or reviewing three key financial documents, including the

family’s Personal Net Worth Statement, their tax returns, and their financial plan. Monitoring these

on an ongoing basis can help the family set investment goals, and at the same time guide them in

making appropriate tax-effective decisions regarding their investment selection.

Categorizing Capital Accumulations

Capital refers to the accumulated assets owned by the investor. Some of these assets may have the

potential of appreciating in value over time (pensions, investments, real estate) and will be seen as a

growing source of potential capital and income in the future. However, a drop in the value of capital,

is also possible; furthermore, income-producing assets may become impaired. While diversification

can help reduce some of these risks, ongoing monitoring is critical to ensure that potential changes to

the value or income flow of these assets are re-assessed frequently, and that an effort is made to

determine what effect such changes may have on future net worth and income.

Capital may also refer to depreciating assets used in a business. The value of these assets generally

depreciates because of the wear and tear of their business use.

Categorizing the “Bucket List”: Capital can be broken down into the following categories:

• Pensions: These are typically the “retirement assets”; those used to fund your retirement

income.


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• Financial Assets: These are other savings such as an emergency fund, RESP, non-registered

investments and the TFSA. These may be assets such as rental property that is being used to

build income and capital.

• Non-Financial Assets: This is typically one’s real estate holdings (principle residence, vacation

property).

• Business Assets: This is the value of one’s interest in a private enterprise.

Breaking down the assets into these categories is meaningful because each category (or bucket) may

be set up to have its own future income goal:

• Pensions (for retirement),

• Financial Assets (Emergency, Education, Disability, other savings),

• Non-Financial (Appreciating capital for future income security) and

• Business Assets (Builds both active and passive income and equity).

This list is of great importance in planning tax strategies, to plan an order of investing: first to properly

accumulate and transfer of capital assets within the family ensuring they are in the right hands for

income splitting purposes; and later, to get the best tax results on deemed disposition at death.

Principles in Deploying a Tax Strategy

To build capital, and resulting future income, these guiding principles must be followed:

• Acquire assets in a cost effective and tax-efficient manner.

• Grow assets with tax efficiency; by diversifying holdings, income sources and owners.

• Preserve assets over time (in tax deferred investments).

• Transfer assets into the right hands, during your lifetime and at death, in order to set up tax

efficient family income splitting for the future.

These principles provide the guidance for decision-making in product selection. Be sure to use them

as your benchmark for those purposes.

Establishing a Tax Efficient Investing Process

Tax efficient investing is the process of taking advantage of tax rules (often called tax preferences) so

as to pay the least amount of taxes on income, and accumulate the most after-tax wealth for the family

over a lifetime, and beyond.


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Process is important as it relates to the outcomes on the annual tax return, but even more importantly,

the strategic planning that goes into the selection of investment products, and the structure in which

they will grow can significantly influence the accumulation of family wealth.

We typically think of investing from an individual point of view; however, more powerful results can

be obtained when the family is considered together with the opportunity to invest within corporate

or family trust structures. All of this, of course, depends on the amount of money in play.

Therefore the opportunity for tax, legal and financial advisors to work together with the family for

maximum tax efficiency in planning investment income and the stewardship of capital is significant.

All three parties should be strategically aligned with the clients to get the results wanted.

Strategic tax efficient investment income planning will have significant short term benefits in

increasing cash flow, or decreasing costs, as well as long term effects on wealth creation, growth,

preservation, and transition.

When you take both taxes and inflation into account in the process, while minimizing the costs of

investing, you have Real Wealth Management™.

Elements of the Tax Return

A basic understanding of the elements of the tax return is required to have a fruitful conversation

between all the parties involved in a successful tax efficient investment strategy that builds both

income and capital.

You have previously printed a copy of the T1 General tax return. Recall, there are four basic elements

of the T1 return which all parties should be familiar with:

1. Total Income Line 150 of the Tax Return

2. Net Income Line 236 of the Tax Return

3. Taxable Income Line 260 of the Tax Return

4. Taxes Payable Line 435 of the Tax Return

Total Income considers the taxable amounts of investment income, for example:

• The full amount of interest earnings received or accrued every year

• Grossed up dividends

• Net rental income

In the case of capital dispositions, Total Income takes into account 50% of capital gains, net of losses

incurred during the year.


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Net income, on the other hand is used to determine the level of refundable and non-refundable tax

credits a taxpayer is entitled to. In some case that figure on Line 236 can also affect provincial user

fees.

Taxable income is the figure upon which provincial and federal taxes are calculated. This is a common

definition for all provinces (except Quebec) and the federal government. Taxable income is reduced

by non-refundable tax credits like the spousal amount, which is standard for everyone on the federal

return, but may vary on the provincial portions of the return.

Taxes payable, Line 435 are what it’s all about—most people are not aware of this figure; with the

exception of the benefits received from refundable tax credits, the results on this line determine to a

large extent the cash flow available to most investors on an after-tax basis.

RULES OF TAX EFFICIENT INVESTING

Rule #1: Understand Tax Avoidance, Tax Evasion & the Law.

It is every Canadian’s legal right and duty to arrange affairs within the framework of the law to pay the

least amount of taxes possible. What is not allowed is tax evasion: the intentional understatement of

income or overstatement of deductions so as defraud the government of the correct amount of tax

rightly fully owed.

In some circumstances, transactions contemplated by the client and/or the advisory team could be

subject to GAAR: the General Anti-Avoidance Rules. You may hear professionals talk about whether

a series of transactions are “GAAR-able” (often accompanied by a picture of a vicious dog displaying

fangs!) GAARable transactions can be overturned by the CRA (Canada Revenue Agency) because they

circumvent the intent of the law.

Comprehension Self-Test #1

Based on your reading, answer the following question. Check on the Knowledge Net for the expected answer.

1. What is tax evasion?

Tax evasion is the act of making false or deceptive statements in a return, certificate, statement or answer filed or made to the CRA in order to evade payment of tax or to willfully evade or attempt to evade compliance with the Income Tax Act.

2. What does GAAR stand for?

General Anti Avoidance Rules.


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Rule #2: Select Various Sources of Individual Investment Income.

One of the most important rules in tax efficient investing is income source diversification because not

all income sources earned are subject to the same tax treatment.

Consider the following:

• Joe invests $5,000 into his RRSP, which earns income in the plan.

• Jim takes a portion of his inheritance and uses it to purchase a 4-plex he will rent out.

• Mary invests $100,000 into a strip bond.

• Aleksandra purchases 500 shares of a power utility company that pays regular dividends.

• Judy invests in a Tax Free Savings Plan for her university-bound daughter.

For tax purposes, all of these different investing activities attract different income sources and

different tax results for the individual taxpayer. For this reason a tax efficient investment strategy is

necessary to manage the ultimate results from investing activities, and their timing.

In Part 2 of this course we will discuss categories of assets and the common tax planning strategies

that can be used to achieve income tax efficiencies, by selecting the right type of account investment

income should be earned in, when that investment should be made, what income should be realized

for tax reporting purposes and by which member of the family.

Rule #3: Consider Taxation of the Family Unit, Too.

In Canada it is the individual who is subject to tax under a system of “progressivity”. That is the more

you earn, the more you pay. This gives rise to a number of tax brackets, subject to varying tax rates

under which every family member can benefit.

However, households make economic decisions as a unit, and this is an important consideration not

just from the point of view of net tax on income, but also when contemplating how tax on capital will

ultimately be levied. For these reasons, it can make some sense to transfer income from the higher

earners in the family to the lower to get better results for the family unit. However, CRA allows this in

only limited circumstances. For the most part the Attribution Rules will thwart transfers of income

and capital to family members. More about this in later chapters.

Finally, it is also important to point out that while individuals are subject to tax, the receipt of

refundable tax credits is often based on family net income (net income of each spouse in the family

unit). Therefore we always like to consider net income results on a family basis.

The fairness challenge, however, is this: the highest marginal rates in Canada today are paid by those

subject to the various clawbacks of income-tested benefits, which kick in as you earn more. Therefore

tax efficient investing for those families is most important: an eligible investor who puts one dollar in


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an RRSP, for example, receives a higher return of taxes otherwise paid due to the high marginal tax

rate the family is subject to when clawbacks are considered.

Therefore, tax efficient family income is income that has been arranged to take advantage of the

differing tax treatments for the different types of investment income, and with consideration of social

benefits, personal tax situations, and cash flow. Tax efficient investing maximizes the advantages of

marginal tax rates by spreading investment income among various family members where possible,

and advantageous.

Rule #4: Use Alternative Tax Profiles.

In some families, taxation extends beyond the individual and the family unit to “alternative taxpayers”.

This can include operating companies in the case of family businesses, holding companies, and family

trusts. When a taxpayer dies this can also include alternative T1 tax returns for certain types of

income. These “alternative taxpayers” can provide a way to split and defer income and protect capital

when wealth is transitioned. It is important that the taxing provisions discussed for individuals and

family units are considered with respect to those alternatives, if possible, practical and contributory to

the tax efficiency model. The assistance of specialists in setting up those structures will be required.

Rule #5: Integrate the Time Value of Money.

Tax efficient investment income is also income that will be “multiplied” to the maximum extent

allowable. Every dollar of investment income that can avoid tax, or be subject to tax at a lower rate,

provides additional capital to be re-invested. Careful attention to maximizing tax efficiency of

investment income can result in huge increases in overall investment returns when compounded over

several years, especially when such compounding happens in a tax exempt or tax-deferred

environment.

Rule #6: Don’t Work in Silos: Use a Team Approach.

Tax efficient investing links tax strategies and investment strategies into an overall strategic plan for

Real Wealth Management that considers and leverages income, capital, tax preferences, a variety of

family tax filing profiles, family investment structures, and investment income sources. The end result

of the tax-efficiency strategy is to accumulate more capital for re-investment, grow it, preserve it and

then use it in a tax efficient manner to maximize its purchasing power. In this way the money saved

has maximum value to provide income for lifestyle needs and wants, and security for the future.

Strategies introduced by the family’s tax advisor to minimize tax erosion on income and capital, can

be thus linked to investment and financial advisory strategies. (The successful alignment of tax


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planning with investment, retirement, risk management (insurance) and estate planning can help

build, maximize, and preserve sustainable family wealth.

There is a definitive link between the results of investment activity which produces various income

sources, and their place on the personal tax return. An astute Real Wealth Management Strategy is

the bridge between investing activities and their after-tax results. It is important that investors

understand the link between the two to proactively make joint decisions with their advisory team to

enable the results of this planned strategy and process.

Tax Tactics: The Link between Investment and Tax Realization

Activity

In planning for tax efficient investment income, and the real goal: accumulation, growth and

preservation of after-tax capital, advisors and their clients should discuss tactical income realization

strategies.

Income is realized for tax purposes in different ways, depending on the source. The diagram that

follows illustrates this and shows the link between the investing activities taxpayers and their advisors

often undertake throughout the year. The bridge between the two activities are the tax strategies

which help the investor avoid, defer, reduce and shift taxes on income earned over time. Tax and

financial advisors should first work together to align under the required RWM Strategy, and then

employ the rules of Tax Efficient Investing.

RWM Strategy: Principles in Deploying a Tax Strategy:

• Acquire assets in a cost effective and tax efficient manner

• Grow assets with tax efficiency, by diversifying holdings, Income sources and owners


• Transfer assets into the right hands, during your lifetime and at death, in order to set up tax

efficient family income splitting for the future.

Rules for Tax Efficient Investing:

• Understand Tax Avoidance, Tax Evasion and the Law as it relates to rights and compliance

• Select various sources of individual investment income for best tax results

• Consider taxation of the family unit as a whole

• Use alternative tax profiles, as warranted

• Integrate the power of the time value of money

• Don’t work in silos: use a team approach to developing tax and investment strategies


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Tactics for Tax Efficient Investing:

INDIVIDUAL FAMILY UNIT OTHER UNITS

AGE AGES CORPORATE, TRUST

TAX EFFICIENCY

STRATEGY

INCOME SOURCES: PRODUCT ADVISORY STRATEGIES

INTEREST DIVIDENDS CAPITAL GAINS OTHER SOURCES

1. AVOID TAX Transfer to Spouse Donate, Sell QSBC

Shares )

Insurance, TFSA,

Damage Settlements,

Lotteries

2. DEFER TAXABLE

INCOME

IAACs Stock Dividends,

Deemed Dividends

Replacement

Properties

RPP, LRIF, LIRA, PRPP,

RESP, CESP, CLB, RDSP,

Lump Sum awards

3. EARN TAX

PREFERRED

INCOME

Disposition of assets

including:

Mutual Funds,

Convertibles,

Options, Warrants,

ETFs, Metals, etc.

4. TIME RECEIPT OF

FULLY TAXABLE

INCOME

Interest Employment,

Superannuation,

OAS, CPP (if single),

Net Rental Income,

Net Business Income

(including traders)

5. BLEND INCOME

& CAPITAL

Annuities Income Trusts

6. REDUCE NET

INCOME

Carrying Charges RRSPs, PRPPs, Tax

Shelters

7. REDUCE

TAXABLE INCOME

Apply Losses

8. OFFSET TAXES

PAYABLE

LSIFs Maximize Non-

refundable tax credits

9. SHIFT TAXES Family Income Splitting, Inter-family loans


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Alternative structures: family trusts, investment holding companies

ACB Planning, Residency, Non-residency, death of taxpayer

10. MANAGE TAX

RESULTS

Taxes payable* OR

Refundable

Maximize Access to Refundable Tax Credits (federal& provincial)

Withdraw Savings

Reinvest Tax Savings

* Note: Effect of Minimum Taxes, Available Loss Application rules, Other Tax Preferences on final outcomes


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Tax Tactics and Terminology

In the chart, you will have noticed ten strategies for tax efficient investing:

• Avoid Tax Entirely

• Defer Tax on Income

• Earn Tax Preferred Income; that is, income that is partially included in income or taxed at more

advantageous tax rates.

• Time Receipt of Fully Taxable Income carefully; that is, try to time it to blend well, if you can, with

other income sources and vice versa.

• Blend Income and Capital for Tax Preferred Cash-Flow

• Reduce Net Income with Tax deductions, in particular the RRSP, and tax deductible interest and

management fees

• Reduce Taxable income, by properly applying losses

• Offset Taxes Payable by maximizing refundable and non-refundable tax credits

• Shift Taxes to Lower Income Earners or into Alternate Tax Structures

• Manage Tax Results: Reinvest any Tax Savings from Tax Efficient Investing and Minimize Capital

Withdrawals to pay taxes or instalments.


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KEY CONCEPTS

The five steps in a Real Wealth Management Process are the starting point in integrating tax strategies into the

elements required for sustainable family wealth: accumulation, growth, preservation and transition of wealth.

Tax strategies aligned under a RWM Strategy require that tax efficiencies be developed for both income and

capital.

Under a tax strategy:

• Acquire assets in a cost effective and tax-efficient manner.

• Grow assets with tax efficiency; by diversifying holdings, income sources and owners.


• Transfer assets into the right hands, during your lifetime and at death, in order to set up tax efficient

family income splitting for the future.

Disciplined spending is a precursor to the accumulation, growth, preservation and transition of family wealth;

therefore debt and cash flow management, on an ongoing basis is critical.

Tax and wealth advisors must both understand and work within the elements of a tax return, planning both net

and taxable income levels to get the desired marginal tax rates on a variety of income sources.

Tax efficient investing also depends on a solid understanding of the differences between the various marginal

tax rates for each type of investment income earned by each member of a family unit.

There are six basic rules for developing a tax strategy:

• Understand Tax Avoidance, Tax Evasion and the Law as it relates to rights and compliance

• Select various sources of individual investment income for best tax results

• Consider taxation of the family unit as a whole

• Use alternative tax profiles, as warranted

• Integrate the power of the time value of money

• Don’t work in silos: use a team approach to developing tax and investment strategies


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There are ten basic strategies for tax efficient investing:

• Avoid Tax Entirely

• Defer Tax on Income

• Earn Tax Preferred Income; that is, income that is partially included in income or taxed at more

advantageous tax rates.

• Time Receipt of Fully Taxable Income carefully; that is try to time it to blend well, if you can, with

other income sources and vice versa.

• Blend Income and Capital for Tax Preferred Cash-Flow

• Reduce Net Income with Tax deductions, in particular the RRSP, and tax deductible interest and

management fees

• Reduce Taxable income, by properly applying losses

• Offset Taxes Payable by maximizing refundable and non-refundable tax credits

• Shift Taxes to Lower Income Earners or into Alternate Tax Structures

• Manage Tax Results: Reinvest any Tax Savings from Tax Efficient Investing and Minimize Capital

Withdrawals to pay taxes or instalments.

Order of Investing: Integrating Tax Strategies with Investment Decisions:

Tax efficient investing should be thought of as a continuum. Selecting investment products to achieve the

correct income results is important. What comes first, the Tax Free Savings Accounts, registered investments,

non-registered investments, tax preferred investments, blended investments that provide an opportunity for

cash flow planning or specialty investments that can reduce net income, the figure upon which new cash flow

in the form of increased social benefits, refundable and non-refundable tax credits is based?

At the core of tax efficient investing is to understand, and take advantage of, the differences in marginal tax

rates among family members, their sources of income and timing of realized investment income, both now and

in the future.


1.21

QUIZ

This completes the written portion of your module material.

Please return to your Student Resource Centre and take the CE Quiz for your certification and

accreditation.

how investors earn income from capital · pdf filea make-up quiz is available for this module,...

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