As we get closer to the end of the fiscal year, many savvy investors will be looking to ensure they have taken advantage of all of the year-end tax planning opportunities available, or at least those that are useful to them. There are different programs that are sensitive to calendar year-end deadlines such as charitable contributions, Education Savings Plan contributions, and tax-loss selling. These are the investment house-keeping items that need to get done but, not too many people focus on what they should not do, such as investing non-registered money into certain investment pools at the end of the year.
If you have a bonus from work or a lump sum of money that came to you through an inheritance or lottery windfall, you may be looking to invest those non-registered funds into the markets by way of a mutual fund or investment pool of sorts. The end of the year may not be the best time to invest into this type of holding. The reason is that this type of investment typically declares its distributions the last few weeks of December.
Over the course of the year, many funds will do a lot of buying and selling of stocks. This activity of buying and selling will subject the fund to taxes due to capital gains that have been incurred over this time and these gains are the responsibility of the shareholders of the fund from a tax liability standpoint. They are also responsible for the taxes due on dividends and interest received over the same time frame. This is fair if the investor benefitted from the gains and income in the fund from the beginning of the year but, if you were to purchase into the fund just before that income were distributed, you would be responsible for the taxes on income you did not necessarily receive.
Before investing non-registered funds into a portfolio in December, it would be prudent to take a look at the type of fund it is. A capital class fund is one that is able to share its gains and losses with funds of the same family and structure so as to minimize the overall tax bite to the investors in the holdings. You should also look at the history of the class structure. Even a capital class holding can have a history of sizable distributions, so it would be a good idea to invest in holdings that do not have a high turnover of securities.
Regardless of your current tax situation, if you want the biggest bang for your buck in year-end tax planning, you will be best suited investing non-registered money into a portfolio that takes into consideration your overall personal tax position both now and in the future. This approach involves portfolio managers who participate in tax-loss selling specifically for you to build up a reserve of losses to be used in the future when you have a real tax problem in need of a solution. These capital losses can be used to offset the taxable capital gains that you get when you eventually sell your funds at a profit. If properly executed, you can manipulate your portfolio to stockpile losses over time.
When it comes to capital losses, it is better to have them and not need them than to need them and not have them as there will likely come a time when you are going to need them.
Doug Riding BA, CFP, FMA, FCSI
Investment Advisor with IPC Securities Corporation