For business owners and actually for everyone else as well, a tax strategy that is not used very often is to keep your stocks outside your RRSP (if, unfortunately you have an RRSP; more on that later) and to keep your secure investments such as GICs and bonds inside your RRSP.
This is recommended because stocks are taxed at a lower rate than GICs or Bonds. A simple example will clarify this:
The scenarios as follows: An investor has $100,000 in total assets and, after sitting down with a Financial Planner, A suggestion is made to have 50% in Stocks and 50% in Bonds and GICs.
SCENARIO 1
At the beginning of a calendar year, the client keeps $50,000 in GICs or bonds outside RRSP and $50,000 of stocks inside RRSP. The stock goes up by 10% and no dividend and the bonds or GICs earn 2% of interest which comes out to $1,000 of interest. The tax consequence will be:
For the non RRSP: $1000 interest income taxed at 45%= $450. No taxes to be paid for the growth of the stock because it is in an RRSP so the total tax bill is $450.
SCENARIO 2
At the beginning of a calendar year, the client keeps $50,000 of stocks outside the RRSP and $50,000 in GICs or bonds inside RRSP. The stock goes up by 10% and no dividend and the bonds or GICs earn 2% of interest which comes out to $1,000 of interest. The tax consequence will be:
For the non RRSP: no tax to be paid because the stock’s growth is not taxed since it was not sold. Even if it was sold the gains it made would be taxed at a much lower tax rate than interest from a GIC or bond. For the RRSP there is no taxes to be paid since the income of $450 is not taxable inside an RRSP, so the total tax bill is $0.
No brainer right?
Regarding my ‘more on that later” comment that I made earlier concerning RRSPs for business owners, I have ranted about the fact that business owners should not contribute to an RRSP. For more info on that click HERE to view a blog I did on this subject.
For more advice and to learn the best kept secrets of the banking industry and the investment industry visit my podcast called “Confessions of an Ex-Banker” HERE. You will find tips from an insider (me of course) that can save you thousands of dollars in fees right away. You can also subscribe at iTunes.
If you have any questions or would like to review your situation from an unbiased point of view, email me at: john.kalos@meritfinancialplanning.ca
Until next time.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.
