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Do you invest money in a taxable account? If you do then an article I wrote for the Financial Post way back in 2011 is still relevant to you.
In the article I explain three simple yet effective ways to improve the tax efficiency of your investment portfolio. Tax can be a major drain on your investment performance, in some cases you can be losing up to a whopping 53.53% of your investment gains in Ontario.

Technique 1: Compensating your investment advisor

When compensating your investment advisor, the more tax efficient option is fees paid directly to him or her rather than paying commissions on trades. The reason is that fees are generally fully deductible on line 221 of your personal tax return whereas commissions are added to the cost basis of your investment thereby reducing your capital gains which are only taxed at half the normal rate.

Technique 2: Mutual funds with low turnover

For the most part mutual funds are structured as trusts, which means that they are flow-through entities for tax purposes (they distribute taxable gains and income to their unit-holders). Fund managers that trade their positions heavily will often have larger taxable capital gains to distribute every year in comparison to funds that have low portfolio turnover. Lower turnover often translates to lower capital gains to report on your personal tax return which in turn translates to less tax paid.

Technique 3: Restructuring your debt

Paying interest on money borrowed to purchase personal items is not tax deductible in Canada, however, interest paid on money borrowed to generate rents, royalties, interest and dividends can be. By having a qualified tax advisor look into your current borrowing and investment situation you may be able to convert previously tax inefficient debt into tax efficient debt. The scope of this subject is beyond this blog post, but I will be writing something in more detail later.

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Campanella McDonald LLP is a full-service accounting firm based in Oakville Ontario. The firm’s partners and staff concentrate on helping small businessesindependent professionals, and real estate investors maximize their bottom lines by providing specialized accounting, assurance, tax compliance, tax planning and financial advisory services.

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