Start Planning Your Investment Strategy For 2018

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When it comes to investments, pre-plan now to maximize your financial health for the coming year. Steve Bokor, CFA and a licensed portfolio manager with PI Financial Corp, a member of the Canadian Investor Protection Fund (CIPF), offers some tips. 

[dropcap]I[/dropcap] can’t believe it’s that time of year again.  For many, the holiday festivities have already started and so has the rush to buy gifts for loved ones, but don’t forget to take care of your financial plan. Given all of the bumps and blips this year, we need to stop and take a serious look at our investment portfolios so that we’ll pay the least amount of taxes to the Canada Revenue Agency (CRA) and prepare for 2018.

Take Care of Your Taxable Investments

Typically, there are several major areas that need to be addressed to maximize your financial health.

First, reduce or eliminate any realized capital gains in your portfolio. For trading purposes, there has been a change by the Canada Revenue Agency. The last day to execute trades for 2017 is now December 27th . So look for any dogs (investments trading below their adjusted cost base) in the portfolio. By selling them, you will crystallize the loss, which can then be used to reduce the tax liability on investments sold at a profit.

But what if you don’t have any losses? In that case, take a look at your spouse’s investment portfolio. If your spouse has unused, unrealized losses, there is a way to make use of them, so ask your accountant about using the superficial loss rules to your advantage. This is a relatively unknown strategy, but I’ve been using it very successfully for my clients for years. However, it is critical to start the process in November, so do make a note to address this earlier next year.

Now, for those investors who have incurred significant capital losses this year, it might be advisable to trigger a capital gain, which will then be sheltered from tax. And if you are still in love with the investment, you can repurchase the security but now it will have a higher adjusted cost base.

Finally, if your review has uncovered a realized capital loss and you can’t or don’t want to trigger a capital gain, the Canada Revenue Agency does permit taxpayers to apply a realized loss against realized capital gains for any of the previous three tax years. Simply fill in the “Request for Loss Carryback” form available from the CRA or have your accountant do it for you when your tax returns are filed.

Review Your Registered Investments

Once you’ve squared away your taxable investment portfolio, it’s time to review your registered investment portfolios. For retired investors, there are a number of strategies. For example, if you are over 65 but still working, consider converting part of your Registered Retirement Savings Plans (RRSPs) to a Registered Retirement Investment Fund (RRIF) and withdrawing $2,000 per year in order to receive the pension income tax credit. Either that or continue to maximize your RRSP contribution until the year you reach age 71.

For investors over age 71, the plan administrator of your RRIF will inform you of your mandatory RRIF withdrawal each year, before December 31. However, if you do not need the cash due to pensions or investment income, consider taking your RRIF payment in kind. There is no need to actually convert your RRIF assets into cash in order to make a payment. The value of the withdrawal will still be added to your income for that year, but you can avoid transaction costs if you take the payment in kind.

For the rest of us, we have to consider the importance of maximizing RRSPs, Tax Free Savings Account (TFSAs) and, for some, Registered Educational Savings Plans (RESPs). The government now allows investors to wait until 60 days after the calendar year to make a RRSP contribution, but why not avoid the rush?

I know what you’re thinking — sometimes it’s hard to come up with all that cash in December, especially when you are maxing out the credit card or credit lines. Again, consider making all those contributions with non-registered investments. Call your financial advisor and have them contribute mutual funds, stocks, bonds and ETFs in lieu of cash.

However, there is a catch because the CRA considers contributions to registered accounts as a disposition for tax purposes — and it gets worse. If the contribution results in a capital gain, you have just incurred a tax liability, and if the contribution results in a loss, the CRA denies the tax benefit. So unfortunately, it’s better to sell a dog and contribute the cash. It’s what I refer to as “heads they win … tails you lose”.

In terms of priority, I advise my clients to first consider maximizing their RRSP contributions, then their RESPs, if applicable (remember, the government provides a 20 per cent bonus on contributions up to $2,500) and finally their TFSAs. The TFSA now permits a lifetime contribution limit of $52,000, which will jump to $57,500 on January 1, 2018. TFSAs are available to all Canadians over the age of 18 but in British Columbia the plan cannot be opened until age 19.

The federal government seems intent on creating a more fair tax system but in my experience it generally leads to higher taxes not lower ones. In all fairness, the Government of Canada now has extensive online information regarding the choices investors have when looking at registered versus non-registered investments as well as RRSP maturity options, but in my opinion the information is getting more complex.

I believe Canadians need to use the rules to their advantage. If you are turning 71 in 2017, your RRSP will mature so don’t wait until December 31 before choosing an option. And do choose the one that best suits your income needs, now and for the future. Talk to a professional to ensure you have made the right decision.


TFSA vs. RRSP

Both tax shelters help your investments compound tax-free for the long term, but there are important differences. Work through these steps to help figure out which is best for you.

TFSA

Default Option: The TFSA is flexible and easier to use, so if you don’t have the time to figure it out exactly, or lack clarity to optimize, go with the TFSA — you can always switch to an RRSP later.

Emergency Access: Any money you’ll need in an emergency has to be accessible. Have a cash emergency fund, but also consider keeping some of your long-term savings accessible in your TFSA, just in case.

Behaviour: RRSPs can only beat TFSAs if you’re making RRSP contributions pre-tax (i.e. contributing your refund too, so more goes in the RRSP). If you fritter away your refund, go straight to the TFSA.

Low Income: If you’re lower income (<$40k/yr) — in particular if you may be eligible for GIS in retirement — then look towards the TFSA. The clawback on GIS from RRSP withdrawals will be too high.

RRSP

Special Situations: Buying a house? The RRSP HBP lets you use pre-tax money for your down payment, which helps you avoid CMHC fees. An upcoming mat/pat leave may also let you use tax arbitrage early.

Tax Arbitrage: Most comparisons skip straight to this step. If there are no other strong factors, then the RRSP will be better for people who have a lower tax rate in retirement than in their contribution years.


 This article is from the December 2017/January 2018 issue