The Top FiveTax-Efficient Investing Strategies

Frances Cheng, MBA, CFA, FRM, CFP, FCSI

Over 10 years experience in Corporate Finance, Institutional Banking, Wealth Advisory and Management, Investments and Financial Planning

Guest Speaker at different community forums

Guest Professor of Finance, Economics and Accounting at Kingston College

Assist affluent individuals manage their wealth more effectively as well as reaching their long-term financial goals

Author of tax-planning articles

Frances Cheng, MBA, CFA, FRM,CFP,FCSI

Frances Cheng, MBA, CFA, FRM, CFP, FCSI MBA major in finance with Distinction at

University of Hull, England and obtained the “Overall Best Student” award

Certified Financial Planner Certified Investment Manager Fellow of the Canadian Securities

Institute Hold A.C.I.B., M.C.I.M., M.I.Mgt., F.C.A.M.

designations

My Expertise & Experience Comprehensive Financial Planning Tax Planning Analysis Estate Planning Analysis Investment Planning, Strategies,

Quantitative Analysis and Fundamental Analysis

Insurance Planning Retirement Planning Education Planning

WillsTraditional Brokerage

RRIFs, LIFs, LRIFS Trusts

ASSET PROTECTION

Managed Money

Company Pension Heirs

Charity

Disability Investments & RRSPs

Critical Illness

Survivor Income

Fee-Based Brokerage

Risk Management

Business Succession

RETIREMENTINCOME PROTECTION INVESTMENTS

CLIENT & FAMILY

ESTATE PLAN

FAMILY PRIORITIES

Net Worth

Real Estate

Assisting Kids

Assisting Parents

ACCUMULATING WEALTH

MANAGING WEALTH

PRESERVING WEALTH

FINANCIALPLANNING

Education Planning• RESPsRetirement Planning• RRSPs/RRIFsInsurance Planning• Disability• LifeTransition Planning• LIRA, LIF, LRIF

PORTFOLIOMANAGEMENT• Non-Discretionary• Discretionary

ESTATE PLANNING• Wills & Trusts• Tax Liabilities• Inheritance/Legacy• InsuranceSUCCESSIONPLANNING• Trusts• FinancingPHILANTHROPY• Trusts & Foundations

STRATEGIC GROWTH

1. NEEDS ASSESSMENT

3. IMPLEMENTATION

& REVIEW

2. SOLUTION DEVELOPMENT

Strategy #1 Split Income for Hefty Tax

Savings Also called ‘Income-Splitting’ Involves shifting income from

the hands of one family member who pays tax at a high rate, to another who will pay tax at a lower rate.

Example

BOB Earns $120,000

a year MTR @ 46.4% in

Ontario Tax $4,640 on

investment income $10,000

MARY Earns $20,000 a

year MTR @ 22.2% Tax $2,220 on

investment income $10,000

Attribution Rules

Transfer to

Gift Loan with No Interest

Loan at interest*

Spouse Attribute all investment income and capital gains back to transferor

Attribute all investment income and capital gains back to transferor

No attribution

Attribution Rules

Transfer to

Gift Loan with No Interest

Loan at interest*

Minor child

Attribute all investment income, but not capital gains, to transferor

Attribute all investment income, but not capital gains, to transferor

No attribution

Attribution Rules

Transfer to

Gift Loan with No Interest

Loan at interest*

Adult Child

No attribution

Attribute all investment income and capital gains if loan made specifically to avoid tax

No attribution

Methods to Split Income Lend Money to a Family

Member Swap Assets with a Family

Member Second-Generation Income

Lend $ to a family member (CCRA rate @3%p.a.)

Bob Mary Loan from Bob

Loan to Mary

Investment income

$10,000 $0 $3,000* $10,000

Interest expense

0 0 0 ($3,000)*

Taxable income

$10,000 $0 $3,000 $7,000

Marginal tax rate

46.4% 22.2% 46.4% 22.2%

Tax Liability $4,640 $0 $1,392 $1,554

Total Tax-Savings of $1,694 !

Swap assets with a family member Swap income-producing assets

(e.g. investment in stocks and bonds) by high-tax payer with low-producing assets (e.g. jewelry, artwork, rare coin, or spouse’ share of the family home) owned by low-tax family member.

Swap at FMV, be aware of the capital gain tax at swapping

Second-Generation Income Bob gives Mary $10,000. Attribution rule applies since Bob charges

no interest from Mary. Mary invests this and earns 10%

annually, I.e. $1,000 p.a. Bob will face a tax liability on $1,000

income. Mary puts $1,000 income into a separate

investment income a/c. Any income and capital gain earned on this $1,000 is second-generation income, and is NOT subject to the attribution rules.

Second-Generation Income Mary invests $1,000 and earns 10%, the

first year she will report $100 of income. Reinvest this income and to build a

bigger portfolio in her hands. If this continues each year for 15 years,

she can repay Bob his $10,000 at the end of 15th year and still be left with almost $22,000 in the portfolio – all of which is being taxed in her hands.

Strategy # 2 Utilize Capital Losses Properly Superficial Losses How to avoid

Trigger Capital Losses on Transfers to Children Repurchase the investment inside your RRSP Repurchase a similar investment

Transferring Capital Losses

Strategy # 3 Minimize Tax on Capital Gains Capital Gains Splitting

Strategy # 4 Consider the debt-swap strategy

Strategy # 5 Arrange for tax-efficient cash flow Effective use of Money Market

Corporate class funds Dividends from a private corporation Prescribed annuities Mark sets up a PAC Systematic withdrawal plans