Evelyn Jacks: At Year End, Increase Investment Returns with Tax Planning

Tax planning is about what you keep to live your happy life with. It’s too bad so many people miss out by failing to think about year end tax planning in the family.

Understanding your lifetime tax obligation is an important motivator because it will help you understand the magnitude of tax savings possible. Consider this reality check: Find the amount of taxes you paid last year on Line 435 of your tax return. Now multiply that figure by an average working lifetime of 40 years. It’s probably a big number. Are you living with a working spouse? Double the figure if your incomes are relatively equal from similar sources. Four adults in a family in similar income situations will double this amount again. 

The conclusion is not difficult: income tax, together with all the other taxes we pay on consumption, property taxes, sin taxes, and so on is expensive. For many families, the income taxes they pay year over year is their single greatest lifetime expense.  However, income taxes are the only type of taxes you are required to pay in which you have the option to arrange your affairs—within the framework of the law—to pay the least amount possible. You need only pay the correct amount, not more, and using legal and available tax planning techniques significantly reduces that number. 

That makes the final quarter of the year—October to December—a very good time to review what can be done to make sure your 2014 tax liability is as low as it can be in your family. If you are a tax or financial planning professional, this is a critical time to see your clients, for those purposes.

Start with some tax literacy. My rule on this has always been simple: there is no such thing as a stupid tax question, especially at year end. For example, most people don’t understand that different income sources are taxed in different ways. Each type of asset and / or investment has its own unique tax attributes—when invested—as income and value grows and / or on disposition. To build wealth efficiently we must focus on those assets or investments that have the lowest tax cost at the time of investment, during growth and at withdrawal or transition to the next generation.

In addition, in many cases, paying investment costs like interest or fees are a necessary component of the wealth building process which requires management. The lower the fees and costs, the easier it is for money managers and lenders to add long term value to family wealth. That’s important, too, because certain other wealth eroders are uncontrollable: the cost of inflation, for example, or unexpected risks from currency fluctuations or political change.

It’s Your Money. Your Life. To more rapidly acquire, grow, protect, and transition sustainable family wealth, advisors and clients should consider a proper order of investing. This year end, consider what should come first: the RRSP or the TFSA, the RESP or the RDSP, interest or dividend-producing investments. If you are unclear about what these acronyms mean and what the attributes of these common investments are, consult with a Tax Services Specialist before year end. Be sure to cover year end donation planning and how speeding up the generation of tax losses in your non-registered accounts, medical costs or business asset acquisitions can help you reduce personal taxes.

Evelyn Jacks is President of Knowledge Bureau and author of 51 books on tax and personal wealth management. Meet Evelyn on the Year-End and Business Succession Planning Bootcamp tour this November. Follow Evelyn on Twitter at @EvelynJacks.