Michelle Connolly: Taking a balanced approach to decision-making

“Taxes should not wag the investment dog,” says Michelle Connolly. Nor, she adds, should investment decisions ignore potential tax consequences.

 In other words, says the speaker at this year’s sold-out Distinguished Advisor Conference, income taxes and investment considerations should work in concert when you are making financial decisions about your portfolio and its role in your wealth plan. Investments and the nature of the income they generate and taxes should carry equal weight in the decision-making process.

Connolly,  a chartered account and certified financial planner, is vice president of wealth planning at CI Investments in Toronto. Her role is to work with wealth advisors helping them identify tax-efficient solutions for their clients. And maintaining the balance between investment considerations and taxes is a message she repeats.

Take Nortel as an example. Connolly recalls a shareholder who held shares in Nortel as the stock price rocketed ever higher. But rather than sell the shares and pay the income taxes, the investor held on. He let tax considerations drive his investment decision. Of course, we all know what happened to Nortel’s share price.

“So, he held on and lost everything,” says Connolly. “Sure, he would have had to pay 23% of his gains in taxes, but he would have kept 77%. The two of them — taxes and investment — should be considered on an equal playing field.”

Tax leakage is another concern of Connolly’s. “I’m a strong proponent of timing investment income streams and not triggering income unnecessarily,” she says.

She takes as an example baby boomers who are getting ready to retire. They, along with other Canadans in the top tax bracket, are prime candidates for tax leakage from their investment portfolios.

“So,” Connolly advises, “if you don’t need the income to maintain your lifestyle, why generate the tax liability? Why not consider a more tax-efficient investment product that generates a more tax-efficient form of income such as capital gains.  Unearned capital gains do not attract taxes.  Also, as an investor, you are in the drivers’ seat as to when to generate and report the gains.  Presumably, such gains will come in handy after you retire, and/or you are in a lower tax bracket.

Connolly addresses the benefits of tax-efficient investing on the final day of the Distinguished Advisor Conference which runs from Nov. 11-14 in Naples, Fla. The theme of this year’s conference —the ninth — is “Navigation! Charting a New Course.”

"Choosing tax-efficient investment products will help you navigate the stormy seas generated by the uncertainty of the global economy and financial markets," she says. “The more tax efficiently you invest, the less risk you need to take on to generate desired returns and sail the charted course.”