Tax Efficient Investing For Life


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  • (Note to consultant: Please insert your name, title from your business card and the name of the dealer on the slide. The dealer name under which you present yourself will differ, dependent upon whether you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association - MFDA) or Investors Group Securities Inc. (IIROC). If you are licensed through the MFDA, you must use this dealer name on the slide: Investors Group Financial Services Inc. (use in Canada outside Québec) Investors Group Financial Services Inc.,  Financial Services Firm (use inside Québec) If you are licensed through the IIROC, you must use this dealer name on the slide: Investors Group Securities Inc. (use in Canada outside Québec) Investors Group Securities Inc.,  Firm in Financial Planning (use inside Québec)
  • Before we jump right into this presentation and begin discussing tax planning, I want to take a minute to go over this page and discuss these key points. It is important to me that you know a few important things before we start – things that I hope all financial advisors tell you about if you are attending their seminars. First, we are going to be talking about many ideas today but, before you decide to act on any, it is critical that you have a financial planner review your specific situation. Everyone is different so what works for some may not be as applicable to others. Second, this is what I do for a living. If we decide in the future to work together it is important to me that you are aware of how investments and plans work, any fees that might be associated with them, and how I get paid. We have plenty of material that I can share with you at that time that spells it all out very clearly. Now that we’ve gone over that, lets begin by quickly discussing the topics for today… (Note to Consultant) If you are licensed with Investors Group Financial Services Inc. (Mutual Fund Dealers Association – MFDA) use line one of the disclaimers listed above. If you are licensed with Investors Group Securities Inc. (IIROC) use line two of the disclaimers. Delete the dealer line that is not applicable. If there is a guest speaker insert the following disclaimer on this page: Views expressed by guest speakers may not be shared by Investors Group.
  • (Go over presentation outline)
  • I am going to begin this presentation by providing you with a brief discussion on the theory behind tax reduction strategies – Once we’ve established this, we can really get into some exciting opportunities we can provide for you.
  • Determining how much tax you will pay on your investment income depends on a two things: Marginal Tax rate: this is the rate of tax you pay when you earn an additional dollar of taxable income. Type of investment income you receive: Interest income is fully taxable. There is no tax break. Bonds, mortgage and money market funds earn primarily interest income. Canadian-source (Eligible) dividends: Any taxable dividends that you receive from Canadian Corporations are grossed up by 45% to arrive at the taxable amount. For example: If you had $100 in dividends, this becomes $145 . But then you receive a Federal Dividend Tax Credit equal to 19.0% of the taxable dividend received and a provincial dividend tax credit as well . The calculations on dividends are a little complicated, but you may benefit from a reduction in taxes since dividend income is taxed at a better rate then interest income. Capital Gains get the biggest break in higher tax brackets. Only one half of a capital gain is included in income for tax purposes and is taxed at your current marginal tax rate. Mutual funds or securities within an RRSP or RRIF are taxed at your marginal tax rate at the time of withdrawal. Return-of-capital (ROC ) triggers zero tax. Until the time when you have withdrawn the entire amount of your initial investment, monthly payouts are a return of your initial capital and therefore not subject to tax.
  • In general there are four common strategies for reducing your tax bill: Convert: Moving portions of your portfolio into Canadian equity funds that pay dividends or converting some of your interest bearing investments into funds that produce capital gains. To the extent possible, as dictated by the asset allocation model we would create for you, your investments would be arranged so that interest bearing investments are held in your RRSP/RRIF and investments bearing dividends or capital gains are held in non-registered accounts. Divide: By transferring income to your spouse or children you can effectively reduce your overall family unit taxable income. This can be achieved using strategies such as Spousal RRSP, pension income splitting, TFSA spousal contributions, etc… The best options for you can be determined easily during our first appointment. Deductions: Using all available tax deductions and non-refundable credits. Defer: Choosing investments that allow you to defer payment of your taxes. This last example leads us into the next section of the presentation where I will talk to you about how you can defer tax payments on your capital gains and grow your investments on a tax-deferred basis…
  • In many cases, the combination of RRSP and TFSA is enough to meet the needs of the average investors. However, there are limits on how much registered accounts can help you save for retirement. For example, RRSPs have an annual contribution limit of 18% of your previous year’s income to a maximum of $21,000 for 2009 ($22,000 for 2010) and also limits contributions to the end of the year in which your turn 71 years of age. With TFSAs, although there is no age limit (must be at least 18 years of age) you cannot contribute more than $5,000 per year, regardless of your employment income level. So the most anyone can invest in registered accounts for 2009 is $26,000 ($27,000 in 2010). What happens if this simply is not enough to meet your retirement needs? What are your options? Your only option is to invest in non-registered investments. The problem, however, is with traditional non-registered investments you do not benefit from tax deferred growth or portfolio rebalancing without tax implications. But if you dig a little deeper you will discover that more sophisticated investments strategies do exist that can help you benefit from some of the same features as non-registered investments – this is what we’re going to discuss today…
  • Investors Group Corporate Class Inc. funds : With over 40 classes of shares, which, to date, is one of the largest single offering of share classes in this type of structure, allowing us to craft a portfolio recommendation that delivers comprehensive equity diversification. Diversification by sector and geography. Multiple investment advisors and sub-advisors: our corporate structure is the first to offer multiple retail brands within the same structure. World class managers such as I.G. Investment Management, Ltd., Mackenzie Financial Corporation and Goldman Sachs. Fee-free switching: other competitors charge up to $25.00 for each switching transaction. Allegro Corporate Class Portfolios : Allegro Corporate Class Portfolios provide a selection of diversified options within the Corporate Class structure. With Allegro Corporate Class Portfolios, you have the flexibility to make asset allocation shifts and use Series T to generate monthly payouts, without incurring immediate tax consequences. Allegro Corporate Class Portfolios provide a wide range of cross-sector and geographic diversification. Each investment option has been tailored to specifically match your individual and unique tolerance for risk, allowing your Consultant to design a portfolio that fits your plan. Series T shares provide the option of generating steady monthly payouts while still taking advantage of the tax-deferral benefits and growth of investments held within the Corporate Class structure. Each month, you will receive a pre-determined payout, based on the portfolio selected and its market value. These monies are initially a return of capital, which is your original investment and not subject to tax when received. This feature allows money that may have otherwise been used to pay tax, to remain invested and continue to grow. In addition, return of capital payouts have no immediate impact on income tested benefits including the OAS Clawback.
  • Whenever you invest outside of registered investments, you are faced with the possibility of your investment growth being taxed when you re-balance your portfolio. In fact, you could be liable for taxes on realized capital gains every time you rebalance your portfolio. There are, however, investments strategies that allow you to move from a Canadian equity to an international equity investment, from small cap to large cap, from fixed income to specialty, all without realizing capital gains (or losses) and incurring the immediate tax liability normally associated with gains realized as a result of switching. The Income Tax Act (Canada) does not treat switches between shares of the corporation as a disposition for tax purposes. Capital gains or losses are only realized once you redeem your investment from the entire corporation. It is important to note that the Corporation may pay an ordinary income dividend and may make a capital gains distribution in the form of a dividend. The income dividend is subject to the dividend gross-up and tax credit and any capital gains dividends are taxable in the same manner as a capital gains distribution from a mutual fund trust. In such a structure recognition of gains and associated taxes is deferred, allowing the value of the portfolio to grow through the compounding benefits of tax deferral to ultimately increase the potential value of your investment.
  • So who stands to benefit the most a non-registered tax-efficient investment strategy? Investing within a corporate class structure is best suited for clients who: hold investments outside of registered accounts or have maxed out their RRSP and TFSA opportunities. would like the flexibility to switch among a broad range of equity funds without realizing capital gains at the time of the switch, and have a long-term investment horizon.
  • I have told you about some of the advantages of classes of shares over unit trusts. Now let’s walk through an example so you can see how tax-deferred growth can impact your investment. (go over case study details on slide) The graph on the next page will compare the tax implications of a $100,000 investment in a corporate structure to an investment of the same amount in a mutual fund trust.
  • As we can see here, comparing David’s portfolio versus Susan’s portfolio, its evident that investing within a corporate class structure is far more beneficial than in a traditional non-registered investment. Over the period of 25 years, Susan’s $100,000 initial investment into a Corporate Class portfolio outperformed David’s portfolio by $61,894. This is due to the fact that every time Susan rebalanced her portfolio, she did not incur a tax liability, unlike David. The $61,894 advantage is the result of long-term tax-deferred growth. So now that Susan has built the value of this portfolio over the years,, what is the best approach to enable her to generate cash flow from her investments without incurring an immediate tax liability? Let’s find out …
  • If the portfolio was invested in either a Series A or B Allegro Corporate Class Portfolio or Series A or B Investors Group Corporate Class funds your wealth would have built up over a period of time. In order to generate payouts and continue to defer taxes when rebalancing, you would then transfer over your Series A or B portfolio or funds into a Series-T Allegro Corporate Class Portfolio. The Series T portfolio generates regular payouts through return of capital. This means that initially your monthly payment will be a return of the capital you originally invested. Since this amount is comprised of your original capital this return to you is not subject to tax – You will only begin to incur tax once you have depleted your original investment and begin to tap into your capital gains. In addition, as Return of Capital payments are not taxed as income, there is no immediate impact on income tested benefits including the OAS Clawback.
  • Now that you have a better understanding of the main strategies we can suggest to turn your non-registered investments into tax-efficient investments you are in a far better position to grasp the concept of efficient retirement income planning. But this is only one facet of your entire plan. As you can see there are many other sources of income that need to be considered and knowing how to coordinate them in the most tax efficient way is the key to your long term financial success. (Go through all the sources of income on the slide) We don’t have time to go over all of these today, and besides it would be of little use since everyone’s situation is unique and calls for an individualized approach. The best approach is for us to meet and take a closer look at your retirement income plans to identify whether or not there are any gaps that need to be filled. Once we’ve gone through them all, you will quickly realize how I can help you make them all work together – without paying more taxes than necessary in the long run.
  • Tax Efficient Investing For Life

    1. 1. Tax efficient investing for life <ul><li>Investors Group Corporate Class Inc. ™ </li></ul><ul><li>Allegro Corporate Class Portfolios ™ </li></ul>Pieter Demeester Consultant Investors Group Financial Services, Inc.
    2. 2. This presentation… <ul><li>Is provided by Investors Group Financial Services Inc. (In Quebec, a financial services firm). </li></ul><ul><li>Is provided by Investors Group Securities Inc. (In Quebec, a firm in financial planning). </li></ul><ul><li>Is presented as a general source of information only, and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or any other investment or financial matters, please contact an Investors Group Consultant. </li></ul><ul><li>The Investors Group Corporate Class™ mutual funds are shares issued by Investors Group Corporate Class Inc. </li></ul><ul><li>Commissions, fees and expenses may be associated with mutual fund investments. Read the prospectus before investing. Mutual funds are not guaranteed, values change frequently and past performance may not be repeated. </li></ul><ul><li>™ Trademark owned by IGM Financial Inc. and licensed to its subsidiary corporations. </li></ul>
    3. 3. Investors Group Corporate Class Inc. TM <ul><li>Efficient tax-planning </li></ul><ul><ul><li>Reducing your taxable income </li></ul></ul><ul><li>Beyond registered investments </li></ul><ul><ul><li>Our solution for you </li></ul></ul><ul><ul><ul><li>Investors Group Corporate Class Inc. TM </li></ul></ul></ul><ul><ul><ul><li>Allegro Corporate Class Portfolios TM </li></ul></ul></ul><ul><ul><li>Who can benefit? </li></ul></ul><ul><ul><li>A case-study: David vs. Susan </li></ul></ul><ul><li>Generating cash flow </li></ul><ul><ul><li>Allegro Corporate Class Portfolios TM - Series T </li></ul></ul><ul><ul><li>Return of Capital (ROC) </li></ul></ul><ul><ul><li>Coordinating multiple income sources </li></ul></ul>
    4. 4. Efficient tax planning The basics
    5. 5. Understanding Your Taxes <ul><li>How much will you pay? It depends on… </li></ul><ul><ul><li>your marginal tax rate. </li></ul></ul><ul><ul><li>the type of investment income you receive. </li></ul></ul><ul><li>Tax treatment of $10,000 of income under varying types of taxation, assuming a combined marginal tax rate of 46.41%: </li></ul>Interest income Eligible Dividend income Capital Gains income RRSP/RRIF withdrawals Return of Capital Marginal tax rate 46.41% 23.10% 23.20% 46.41% 0.00% Income tax $4,641 $2,310 $2,320 $4,641 $0 You keep $5,359 $7,690 $7,680 $5,359 $10,000
    6. 6. Reducing your tax bill <ul><li>Conversions </li></ul><ul><ul><li>Convert assets into tax-efficient investments </li></ul></ul><ul><li>Deductions </li></ul><ul><ul><li>Use existing tax credits to reduce your overall taxable income </li></ul></ul><ul><li>Divide </li></ul><ul><ul><li>Transfer income to your spouse or children to reduce your overall family unit taxable income </li></ul></ul><ul><li>Deferral </li></ul><ul><ul><li>Choose investments that allow you to defer payment of taxes </li></ul></ul>
    7. 7. Limits placed on registered investments … <ul><li>Registered retirement savings plan (RRSP) </li></ul><ul><ul><li>Annual contribution limit of 18% of your previous year’s income to a maximum of $21,000 for 2009 ($22,000 for 2010) </li></ul></ul><ul><ul><li>Contribution age limit set at 71 </li></ul></ul><ul><li>Tax-free savings account (TFSA) </li></ul><ul><ul><li>Annual contribution limit of $5,000 dollars per year regardless of past year’s income </li></ul></ul>What if these are not enough to meet your needs? Most common option is… <ul><li>Non-registered investments </li></ul><ul><ul><li>Problem: tax liability incurred every time rebalancing occurs </li></ul></ul>
    8. 8. Beyond registered investments Investors Group Corporate Class Inc. TM Allegro Corporate Class Portfolios ™
    9. 9. Tax efficient investing for life <ul><ul><li>Investors Group Corporate Class Inc. funds </li></ul></ul><ul><ul><ul><li>Over forty Investors Group Corporate Class investments </li></ul></ul></ul><ul><ul><ul><li>Broad selection of cross sectors and geographic diversification </li></ul></ul></ul><ul><ul><ul><li>Fee-free switching between investments </li></ul></ul></ul><ul><ul><li>Allegro Corporate Class Inc. Portfolios </li></ul></ul><ul><ul><ul><li>Seven approaches to choose from </li></ul></ul></ul><ul><ul><ul><li>Broad selection of cross sectors and geographic diversification </li></ul></ul></ul><ul><ul><ul><li>Fee-free switching between portfolios </li></ul></ul></ul>
    10. 10. <ul><li>Tax-efficient investing </li></ul><ul><ul><li>Avoid triggering tax liabilities when re-balancing your portfolio </li></ul></ul><ul><ul><li>Allows your investments to grow on a tax deferred basis </li></ul></ul><ul><ul><li>Unique fixed income exposure options provide safety without immediate tax consequences </li></ul></ul><ul><li>Additional benefits </li></ul><ul><ul><li>No contribution limits </li></ul></ul><ul><ul><li>No age restrictions </li></ul></ul><ul><ul><li>No loss of contribution room as a result of early withdrawals </li></ul></ul><ul><ul><li>Limited impact on your income tested benefits </li></ul></ul>Corporate Class takes tax planning seriously
    11. 11. <ul><li>Investors who: </li></ul><ul><ul><li>Hold investments outside of registered accounts, but have maxed out their RRSP and TFSA contributions </li></ul></ul><ul><ul><li>Would like the freedom of adjusting their portfolio regularly without realizing capital gains </li></ul></ul><ul><ul><li>Have a long-term investment time horizon </li></ul></ul>Who can benefit most from this strategy?
    12. 12. Case study: David versus Susan <ul><li>David and Susan have both maxed out their RRSP and TFSA investments and are searching for alternatives. </li></ul><ul><ul><li>Susan opts to invest $100,000 in the Investors Group Corporate Class structure </li></ul></ul><ul><ul><li>David invests $100,000 in the same portfolio but in a traditional non-registered structure </li></ul></ul><ul><li>Let’s assume the following conditions apply </li></ul><ul><ul><li>Both have a 25 year investment time horizon </li></ul></ul><ul><ul><li>Both have a marginal tax rate of 39% for the period </li></ul></ul><ul><ul><li>The Corporation pays a 2% capital gain dividend each year </li></ul></ul><ul><ul><li>10% of the portfolio is rebalanced each year resulting in funds being sold and reinvested. </li></ul></ul>
    13. 13. Case study: David versus Susan <ul><li>The after-tax value of Susan’s Corporate Class investments is over $60,000 greater than David’s regular unit-trust portfolio. </li></ul><ul><li>60% of the portfolio consists of equity investments realizing an annual return of 8.5%. </li></ul><ul><li>• 40% of the portfolio consists of fixed income exposure investments earning a 3.5% return. </li></ul><ul><li>• The portfolio is rebalanced at each year end, resulting in 10% of the funds being sold and reinvested in other funds. </li></ul><ul><li>• The mutual fund trusts make annual distributions of their net investment income and capital gains distributions equal to 2% of net assets. </li></ul><ul><li>• A 39% marginal tax rate, an annual capital gain inclusion rate of 50% and the Corporation pays a 2% capital gain dividend each year. </li></ul><ul><li>• Investments are sold after 25 years. </li></ul><ul><li>• The mathematical table shown is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment. </li></ul>Initial Investment After Tax Benefit of managing investment inside Corporate Class over 25 years $15,000 $9,284 $25,000 $15,473 $50,000 $30,947 $75,000 $46,420 $100,000 $61,894
    14. 14. Generating cash flow Return of capital
    15. 15. Tax efficient monthly payout <ul><li>Transfer your Series A and/or B portfolio and/or fund over to Series-T Allegro Corporate Class Portfolios and save tax through the return-of-capital feature </li></ul>Series A or B Allegro Corporate Class Portfolios Series-T Allegro Corporate Class Portfolios Systematic withdrawal plan with return-of-capital Tax efficient monthly payout Series A or B Corporate Class funds Payout is a return of capital, which is your original investment and therefore not subject to tax
    16. 16. The complexities of multiple income sources <ul><li>Understanding your sources of income is critically important: </li></ul><ul><li>Personal savings: </li></ul><ul><ul><li>RRSP/RRIF </li></ul></ul><ul><ul><li>TFSA </li></ul></ul><ul><ul><li>Non-registered investments </li></ul></ul><ul><ul><li>Etc… </li></ul></ul><ul><li>Government: </li></ul><ul><ul><li>CPP </li></ul></ul><ul><ul><li>QPP </li></ul></ul><ul><ul><li>OAS </li></ul></ul><ul><ul><li>Etc… </li></ul></ul><ul><li>Other: </li></ul><ul><ul><li>Part-time employment </li></ul></ul><ul><ul><li>Home equity </li></ul></ul><ul><ul><li>Etc… </li></ul></ul><ul><li>Employer sponsored: </li></ul><ul><ul><li>Employer pension plan </li></ul></ul><ul><ul><li>Group RSP </li></ul></ul><ul><ul><li>Deferred profit sharing </li></ul></ul>