Common investment errors and tax planning

Mark Goodfield, CPA, CA, LPA, is the creative force behind the popular blog The Blunt Bean Counter and author of Let’s Get Blunt About Your Financial Affairs. In his inaugural column for The TaxLetter, Mark points out some common investment errors and offers some tax planning strategies for investors.

I am involved with some of my clients as their wealth quarterback, coordinating their various investment and professional advisors to ensure that they have a comprehensive wealth plan. In that capacity, as well as in my day-to-day activities as an accountant, I see several common issues arise in relation to their investments, whether they have professional management or manage their own investments. Here is a short list of some of the issues that I see on a consistent basis.

Duplication of investments

Duplication or triplication of investments, which can sometimes be interpreted as “diworsification,” is where investors own the same or similar mutual funds, exchange traded funds (“ETFs”) or stocks in multiple places. A simple example is BCE Inc., which owns Bell Canada and the CTV Television Group. An investor may own BCE in their own “play portfolio”, in their Registered Retirement Savings Plan or in an index or dividend fund. This also often occurs with the major Canadian banks.

Consequently, unless you are diligent, or your advisor is monitoring this duplication, you may actually increase your risk/return tradeoff by overweighting in one or several stocks.

This can also be an issue if an investor uses multiple advisors and the advisors do not communicate. It is therefore important that either you or an assigned advisor review your holdings for any duplication.

Laddering

This is simply ensuring that fixed income investments such as guaranteed investment certificates (“GICs”) and bonds have different maturity dates. For example, conventional wisdom states that you should have a bond or GIC maturing in 2015, 2016, 2017, 2018, 2019 and so on, out to a date you feel comfortable with. However, I often observe clients having multiple bonds and GICs come due in the same year or group of years.

The risk, of course, is that interest rates will spike, creating a favourable environment for reinvesting at a high rate—but you will be caught with no fixed income instruments coming due for reinvestment. Alternatively, rates may drop and you will have your fixed income instruments coming due for reinvestment, locking you in at a low rate of return.

Your fixed income maturities should be monitored by either yourself or your investment advisor.

Tax planning for capital gains and capital losses

Most advisors and investors are aware it may make sense to sell stocks with unrealized capital losses in years when they have substantial gains or have had large capital gains in the three preceding years. Note: Tax-loss selling should make investment sense, not just income tax sense.

However, many investors get busy with Christmas or year-end shopping, business or travel, and often miss the opportunity to take advantage of tax-loss selling or, surprisingly, their advisors do not broach the topic with them.

If you have an advisor, ensure you contact them to discuss your realized capital gain/loss situation. If you handle your own investments, make a summary of your gains and losses for the year so that you can make an educated decision regarding tax-loss selling.

Taxable versus non-taxable accounts

There are differing opinions on whether it is best to hold equities and income-producing investments in your Registered Retirement Savings Plan (“RRSP”) or regular trading account. The answer often depends on an individual’s particular situation; however, the key is to review your tax planning and investment strategy for each account.

For example, if you are earning significant interest income in your non-registered trading account and paying 49 per cent income tax each year, should some or all of that income be earned in your RRSP?  Would holding equities in your RRSP be best, or do you have substantial capital losses you can utilize on a personal basis?

There is not necessarily a one-size-fits-all answer, but this issue must be examined on a yearly basis.

Tax-shelter junkies

I have observed several people who are what I consider “tax-shelter junkies” and continuously buy flow-through shares or other tax-sheltered instruments, year after year.

You must ensure the risk allocation for these types of investments fits with the asset allocation you or you and your advisor have determined.

Beneficiary of accounts

This is not really an investment error, but is related to investment accounts. I have seen several cases of ex-spouses named as the beneficiary of RRSPs and insurance policies. That may or may not be what the investor wants at this time.

Where you have a life change, you should always review whom you have designated as beneficiary of your accounts and insurance policies.

 

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