5 tax strategies to protect your investments

The tax rates on dividends and capital gains are more advantageous than the tax rates on interest or earned income, which means a little tax planning goes a long way for people who can afford to keep money outside a tax shelter, such as an RRSP or TFSA.

After a year of losses on stock markets, here are tips to make even bad news work for you

It makes sense to hold GICs and bonds in an RRSP, because interest income is taxed at your marginal rate. But those investments can also be a good choice for your emergency money in a TFSA. (Shutterstock)

Tax rates on dividends and capital gains are more advantageous than the tax rates on interest or earned income — though recent changes to dividend tax rates are eroding that advantage in some provinces.

While tax-free savings accounts and registered retirement savings plans will keep the tax man from taking a share of any type of income or gain on your savings, some investors plan to keep a portion of their money outside registered plans.

A little tax planning goes a long way for anyone who is well-heeled enough to have a choice over where to put their money.

Tax planning should always take a back seat to overall investment planning geared toward your goals and time horizon, says Beth Hamilton-Keen, director of investment counselling at Mawer Investment Management Ltd. and global chair of the CFA Institute.

"We talk about asset allocation and then we talk about asset location – where is the best place to hold it from the tax standpoint," she says.

With that in mind, here are five strategies to protect your investments:

1. Keep bonds and GICs in an RRSP

It makes sense to keep Canadian fixed-income securities, including GICs and bonds, in your registered account, usually an RRSP, says Hamilton-Keen.

That's because interest income is taxed at your marginal tax rate. That compares with dividends and capital gains, which have preferred tax treatment.

But Hamilton-Keen says she advises planning for long-term investment goals first, rather than just for a tax advantage.

That means a mix of fixed income with stocks, mutual funds and other investments in that RRSP to get a better performance.

"If your RRSP is heavy on Canadian bonds, you're going to say the performance sucked," Hamilton-Keen says.

"An RRSP is long-term money. If I'm getting two to three per cent there, where is the benefit of tax-sheltering?," she adds. "Look at the overall rate of return." 

Dividend-paying stocks and stocks that achieve a capital gain receive better tax treatment than income, and holding them in a corporate account is an option for a small minority of taxpayers.

But for most Canadians, they're growing tax-free inside an RRSP.

2. Hold foreign stocks and bonds outside of registered investments

Most advisers advocate holding foreign bonds and stocks as a way to diversify a portfolio.

Hamilton-Keen suggests that keeping foreign bonds outside registered investment accounts, such as RRSPs or TFSAs, is a better strategy.

"What we've determined is global bonds are best not held in an RRSP. The reason for that is there is a withholding [tax] on the foreign dividend income. You don't get that back if you put it in an RRSP," she says.

Similarly, there may be tax withdrawn at source with dividends of foreign stocks. If you can show the CRA that you've paid that withholding tax to another country, it can reduce your Canadian tax bill.

But it's smart to also hold foreign investments inside an RRSP or TFSA.

"You wouldn't avoid international equities because you're not going to be taxed as well," Hamilton-Keen says.

3. Use a TFSA as a source of emergency cash

Younger people who might not have a steady job, and might be more worried about debt reduction than retirement savings, still need an emergency reserve of cash for when the car gives up the ghost or the roof needs repair.

Aurèle Courcelles, vice-president of tax and estate planning for Investors Group in Winnipeg, suggests keeping anything you can put aside inside a TFSA.

That's because you can withdraw money from the account without the penalty you'd face withdrawing from an RRSP. And the TFSA room you've lost will be restored, though not in the same year.

"If I pull out $10,000 in 2016, next year that $10,000 will get added to room that will be generated for 2017," he says.

That means keeping investments in the TFSA liquid, so you can get at the cash when it's needed. Money-market funds, short-term bonds and Treasury bills are options for investments inside a TFSA if it is your reserve fund.

The interest income on these investments will accumulate tax-free.

Later in life, people often use the TFSA as a way of saving extra for retirement, especially if they've maxed out their RRSP.

"As you get older, those financial obligations start reducing a little bit, your other sources of income increase and your horizon is longer," he said.

"If I'm 40, I can take more risks, because I'm not retiring for another 25 years. I can go more into equity."

4. If you earn over $200,000, plan carefully

People who earn more than $200,000 are going to be paying four percentage points more in taxes in 2016 than in 2015 because of changes the Liberals have made in marginal tax rates.

The federal tax rate for income over $200,000 moves to 33 per cent in 2016, from 29 per cent for 2015.

"We suspect there was a lot of tax-planning done in the last half of 2015, that will artificially bump up tax revenues for our government in 2015," says Hamilton-Keen

"If I know I'm going to have a certain amount of income in 2016 and the tax rate is changing, let me pay that tax on my 2015 rate."

The tax strategy of shuffling income into the 2015 tax year had to be put in place by the end of last year, she says.

Another strategy is to shift discretionary deductions, including RRSPs, capital losses and even some medical expenses, into 2016, according to Courcelles.

"If I'm making an RRSP contribution in 2015, I have the choice to claim it on the 2015 taxes or on 2016. As long as I have the RRSP room, I can move it forward," he says.

That reduces taxable income for 2016 by a higher amount than a single year's RRSP contribution. Courcelles said it is a matter of crunching the tax numbers for both years to see if it makes sense.

5. Use capital losses strategically

With last year's poor performance in the stock market, many investors have capital losses for 2015. Courcelles advises investors to use those losses strategically.

"If losses are less than your gains, you don't have an option: you declare for 2015, the net of the two," he says.

But if the losses are more than the gains, they can be carried back to 2014, 2013 or 2012. Or they can be carried forward indefinitely.

If an investor had capital gains they paid taxes on in any of those years, this is a chance to get the tax rebated. But look at 2012 first, Courcelles says.

"Do I have gains in 2012 that I paid taxes on? This is my last chance to carry back and get my taxes back," he says.

But if you project to have large capital gains in future years, perhaps it would be better to carry the gain forward, he said.


To encourage thoughtful and respectful conversations, first and last names will appear with each submission to CBC/Radio-Canada's online communities (except in children and youth-oriented communities). Pseudonyms will no longer be permitted.

By submitting a comment, you accept that CBC has the right to reproduce and publish that comment in whole or in part, in any manner CBC chooses. Please note that CBC does not endorse the opinions expressed in comments. Comments on this story are moderated according to our Submission Guidelines. Comments are welcome while open. We reserve the right to close comments at any time.