winter 2013

f i n a n c i a l
Make sure your investment portfolio is tax efficient


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As year-end approaches, it’s a great time for investors to review their investment portfolio. Ultimately, it’s not just about paying less tax — it’s making sure investments are tax efficient.

By Trixie Baker, MD Physician Services

As year-end approaches, it’s a great time for investors to review their investment portfolio. Ultimately, it’s not just about paying less tax — it’s making sure investments are tax efficient. While an investor’s first step should be reviewing their investment portfolio with a financial advisor, here are a few options to consider.

Tax deferral accounts

A Registered retirement savings plan (RRSP) is a tax-deferred account, designed specifically to help investors save for retirement. Allowable contributions to an RRSP are tax deductible, lowering an investor’s annual taxable income and their yearly income tax bill. Tax savings will depend on an individual’s marginal tax rate and how much they can contribute. Funds within the RRSP earn income and grow tax free, and are only taxed when withdrawn from the plan. At that time, all money withdrawn is fully taxable as regular income — but generally in retirement, the investor is in a lower tax bracket so the concept of deferral has worked, and less overall income tax has been paid. And don’t forget about the advantage of income-splitting RRSP withdrawals with a spouse a planning technique that can lower the family’s combined tax bill.

The Tax-free savings account (TSFA) is a great way to protect investments from tax. TFSAs allow Canadian residents to contribute up to $5,500 annually, and none of the interest, dividends or capital gains earned are subject to tax, ever. Funds can be withdrawn at any time without tax consequences, and can be re-contributed the following year.

Tax efficiency with permanent life insurance

A permanent life insurance policy offers an individual the opportunity to avoid annual accrual taxation associated with most non-registered investments by purchasing tax-exempt permanent life insurance. Deposits in excess of the pure cost of insurance (up to the allowable tax-exempt deposit limit) can be invested in a selection of market index, daily interest or guaranteed interest accounts, or into balanced-income or conservative-balanced investment accounts that are managed by the insurance carrier. While the money remains fully invested, it won’t generate any taxable interest or distributions, according to the Income Tax Act. A permanent life insurance policy can also be used to help maximize an investor’s estate when they die as the death benefit is distributed tax-free to named beneficiaries.

Incorporation

If a physician chooses to incorporate their medical practice, they may be able to take advantage of some big tax deferral opportunities. There may be an advantage to retaining income in a corporation and deferring the payment of tax at the shareholder level. Tax deferral enables a physician to reinvest income that would otherwise be sent to the taxation authorities. An MD Physician Services advisor can help determine whether or not incorporation — or any of these other tax strategies — makes sense for a physician’s personal financial situation.

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Nexus is published quarterly for Newfoundland and Labrador's physicians. It is a forum for the exchange of views, ideas and information for members.