Professional Tax-Minimization Strategies
For High-Net-Worth Investors
Optimizing after-tax returns requires a dexterous approach; multiple investment techniques and planning strategies must be integrated with the complex world of Canadian taxation. In this paper, we present eleven investment tools professional advisors can bring to the table. These key strategies are categorized into three implementation disciplines: Trading and Operations, Withdrawal Planning, and Diversifying Investments. To minimize a client’s lifetime tax liability from investments, firms need to navigate the nuances across all three fields.
Three Methods to Minimize Tax via Strategic Trading and Operations
a. Tax Loss Harvesting: Tax loss harvesting allows investors to capitalize on investment downturns to mitigate tax consequences. This ‘silver lining strategy’ intentionally sells investments that have experienced losses. These realized losses are used to offset future capital gains or allowable past gains, thereby minimizing taxable income. Through skilled investment management, firms can systematically implement tax loss harvesting throughout the year, aligning with market fluctuations, and ensuring that overall tax impact is minimized.
b. Charitable Donation Planning: Charitably minded investors can maximize tax advantages by leveraging tax-efficient strategies such as donating securities with large capital gains from non-registered or corporate investment accounts. With this strategy, investors forego paying capital gains on appreciated securities, while also receiving a charitable donation tax credit. In some circumstances, corporate donations can expand the owners Capital Dividend Account to allow for larger tax-free withdrawals from the corporation. As with all tax planning, consultation with an accountant is necessary.
c. Custom Factor Portfolio (CFP): While diversification is often believed to be achieved via mutual funds, index funds and exchange traded funds (ETFs), Custom Factor Portfolios (CFPs) can provide diversification with added tax benefits. At North Road, we build CFPs combining hundreds of individual stocks with customized tax objectives, maintaining diversification while enabling a personalized approach to tax minimization. In addition, by owning individual securities, CFPs can supercharge the benefits of tax loss harvesting (by selling just the individual stocks that have losses) and charitable donations (by gifting away just the individual stocks with large gains).
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