Smart Tax Strategies for Investors

Allan Madan, CA
 Sep 13, 2012

This article & video will take you through some smart tax strategies for investors, so let’s dive right in.

Number 1 – Tax Strategy for Investing is Leverage:

The first smart strategy for investors is to leverage. Leverage simply means borrowing to invest. Interest paid on money borrowed to purchase investments that produce profits is tax-deductible. Investments include, but are not limited to, mutual funds, stocks & shares, bonds, and real estate investments.

You’d be surprised how far an interest expense deduction can go on your personal tax return and save you tonnes of money when it comes to tax on investments. Leverage also increases your internal rate of return because you’re using other people’s money, like the Banks, to invest.

Number 2 – Low Tax Investments:

The second smart tax strategy points to buying low tax investments. What does this mean? Well, low tax investments are those which don’t result in a lot of tax on the profits earned from those investments. Let’s look at an example: Assume you earned $100,000 in profit from your investments. There are four different types of ways to classify that profit.

• If the profit is earned as interest, then you’ll be left with $54,600 in profit after tax
• Dividends – $70,000, after-tax
• Capital gains – $77,000, after-tax
• Return of capital, a whole $100,000, and no tax

As you can see, the return of capital is a very low tax investment, in fact, no tax; whereas interest is a very high tax investment, with a lot of tax. As a smart investor, you want to purchase low tax rate investments so you end up with more money once taxes on investments are paid.

Number 3 – Think TFSA:

The third smart tax strategy for investors looking at saving through taxes on investments is to buy high tax rate investments inside a Tax-Free Savings Accounts or TFSA. As the name implies, profits earned inside a TFSA are not subject to taxation. So, it makes sense to make high tax rate investments inside a TFSA and put low tax investments outside of a TFSA.

Number 4 – Income Splitting with Spouse:

The fourth strategy is to loan money to your spouse, and income-split. Let’s take an example. Assume that you are in a very high tax bracket and your spouse is in the lowest tax bracket. Further, assume that you are earning $50,000 in investment income. Wouldn’t you rather have that investment income taxed in your spouse’s name, and not yours, so you pay less tax on the investment overall? The obvious answer is yes. So, how do you go about doing this without getting yourself into trouble with the CRA?

Here’s how:
• Lend money to your spouse
• Charge interest at the current specified rate as determined by the CRA, which is at an all-time low of 1%
• Your spouse uses that money borrowed and purchases an investment that yields profits
• The profits resulting from the investments made will be taxed in your spouse’s name

Presto, you pay a lot lower tax on the investments, because the investment income is taxed in your spouse’s name, and not yours.

Number 5 – Flow-Through Shares:

The fifth tax tip is to purchase flow-through shares. Flow-through shares are investments in resource companies that are involved in exploration and developmental activities. The initial amount of investment in a flow-through share is fully tax-deductible over a period of three years. In fact, about 90% of the deduction is received in the first year alone.

In addition to the tax deductions, you will also receive an investment tax credit which reduces your taxes payable for about 30% of the initial investment. Let’s get this straight – not only do you get a tax deduction for the initial investment, but you also get investment tax credits which further reduce your taxes payable. That’s why investors love flow-through shares.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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