PERSONAL FINANCE – Make money! Save taxes! Organize your life!

Personal Finance – Don’t pay the taxman more than you have to. Tips to pad your wallet.


“Don’t let the tax tail wag the investment dog!” This caution is often offered by investment professionals to clients suffering ‘sticker shock’ on receiving their annual tax bill. You may have heard it yourself. The thing to remember is that a large tax bill is the result of gains and income realized over the year. Better to pay taxes on gains than have no gains at all.

While paying taxes when necessary is understandable, paying more taxes than necessary is not! Arranging and managing your investment portfolio in a tax efficient manner is only prudent. The ultimate objective of investing is to fund your current and future requirements by maximizing your returns in a manner consistent with your means, future needs and risk tolerance.

Here are a few items to consider:

1. The structure – Hold your assets in a structure that makes sense for your circumstances. This structuring is part of the estate planning process and should involve your family/tax lawyer, accountant and investment professional. In addition to holding assets directly in individual cash accounts and RRSPs, as a physician you also have the option of utilizing personal corporations and/or family trusts.

2. Incorporating – A corporate structure can make sense for collecting fees, paying office expenses and holding assets for long periods. When needed, funds can be paid out to shareholders as dividends. The tax rate on dividends is now 21% (down from 31%), so they’re much more attractive. An added benefit is that up to $31,000 dollars can be paid to shareholders who have no income from other sources, tax free. Dividends flow tax free to other corporations. If family members are employed by the corporation, effectively income can be allocated in a tax efficient manner. Small business deductions can often be taken advantage of to defer some corporate tax. When the corporation is sold, it may qualify for a lifetime enhanced capital gains exemption of up to $750,000 (up from $500,000). There are several other advantages, including the opportunity to shelter funds in an Individual Pension Plan (IPP). For more on incorporation do a search for “Incorporation” on

3. Family trusts – As a physician you might also look into family trusts, perhaps in conjunction with a holding company. This can be a good way of both creditor proofing and income splitting. As much as $42,000 can be distributed to children by way of dividends without incurring tax. At the highest marginal rate in Ontario, salary paid directly to individuals is taxed at 46% while dividends are taxed at 21%. Funds may accumulate within retained earnings of a small business corporation after paying tax of 18.6%. By engaging the proper professional team up front, your assets can accumulate in a more efficient manner.

4. Mutual funds – Once you’ve structured your affairs, consider the kind of investments that suit your needs and are tax effective. Mutual funds are an option, but from a tax vantage point may have some deficiencies. Mutuals tend to be mass marketed to retail investors who are primarily investing for their RRSP. Few funds are managed with tax efficacy in mind and, depending on when they’re bought, the purchaser may be buying some capital gain exposure but not the rewards that come with it. Watch for a future column on pooled funds, yet another option for wealthier individuals.

5. Self managed – Your other alternatives are to self manage your investments or hire an investment counsellor/portfolio manager (typically 1% to 2% management fee). Few doctors have the time or inclination to self manage their portfolios. Working with a portfolio manager, you’ll likely want to generate income in your RRSP and make capital gains non-registered accounts since they’re taxed at a lower rate than income. At any point in time, your portfolio manager will be weighing the tax merits of bonds (income) versus preferred shares and common shares (dividends) and income trusts (return of capital and income). Throughout the year, your taxable position should be reviewed with your portfolio manager and tax advisor. You may opt to manage tax liabilities by using flow-through shares and charitable giving. Flow-through shares allow the investor to receive a tax credit for exploration or other activities undertaken by the company issuing the certificates. Charitable giving has been made a lot more attractive recently through allowing shares to be donated at current market value without attributing the capital gain back to the donor. Regardless of which strategy you choose to manage your taxes, always keep your longterm goals and objectives at the forefront. If paying a little more tax will enhance reaching those goals, pay the tax! In other words, “Don’t let the tax tail wag the investment dog!”

Michael Sprung, president of Sprung & Co Investment Counsel Inc, can be reached at 416-934-7160 or [email protected]

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