Tax Planning Strategies - Part 2

Tax Planning Strategies: 4 Strategies You Should Implement this Year (Part 2)

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It’s the beginning of December, and Bob has purchased a rental property from his brother. Imagine how unfair it would be if Bob had to pay tax on his brother’s rental income for the entire year.

Fortunately for Bob, that’s not the case, but this can happen when you purchase an investment in a non-registered account.

For this week’s year-end tax tip, we’re going to look at the dangers of buying an investment in your non-registered account at the end of the year.

 

You can check out last week’s tip here.

 

Timing Your Investment Purchase

Several Mutual Funds and ETFs pay distributions made up of dividends and capital gains at the end of the year. If you own these investments in a non-registered account, a portion of the distribution may be taxable to you.

Connie has been following the XYZ Fund for several months. It’s been performing great all year, and she’s decided to purchase $500,000 of XYZ Fund on Dec 1st.

Since Connie purchased XYZ fund, it hasn’t performed, and her investment has fallen to $475,000. On Dec 30th, the XYZ Fund pays a distribution of $15,000, made up of capital gains and dividends.

At this point, Connie has lost $25,000 and must now pay tax on the $15,000 distribution. Even though these gains and dividends were generated before Connie owned the fund, she will still need to pay tax on the distribution. It’s one thing to pay tax when you’ve made money, but it hurts even more if you haven’t made any.

Before buying a Mutual Fund or ETF in your non-registered account, it’s crucial to determine if the investment will pay a taxable distribution. You may be better off purchasing the investment after the distribution has been paid, so you don’t have to pay the tax on someone else’s profit.

 

Stay tuned for Part 3, where I’ll be going over why it makes sense to generate losses at the end of the year

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Marc Sabourin is a Winnipeg-based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice. 

Disclaimer: The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund

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