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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “Make sure your investing is tax friendly. One major change is a reduced tax on eligible dividends." |
Vancouver, BC (February 26, 2007): It's time to get started on the 2007 tax planning treadmill.
Franklin D. Roosevelt, past US President, once said: "Taxes, after all, are dues that we pay for the privileges of membership in an organized society."
Adrian Mastracci, fee-only portfolio manager at Vancouver based KCM Wealth Management comments, “The recent legislation affecting some 2007 tax provisions is expected to become law soon. Hence, proceed with some caution.”
Nevertheless, it's wise to start the planning process early. Get a sense on what you expect in 2007 while the 2006 results are still at your fingertips.
Investors are advised to appreciate two key areas before we delve into the tips for 2007. My list will be sent shortly.
Here goes:
1. Tax smart investing
First, understand the tax aspects of investment income. That is the tax you pay on interest, dividends and capital gains. All are subject to income tax, but the rates are different.
Make sure your investing is tax friendly. One major change is a reduced tax on eligible dividends. It's now similar to the tax on capital gains in many Provinces.
In BC, the highest tax rate on eligible dividends is 18.5%. The highest tax on capital gains is 21.9%. Compare that to 43.7% as the highest rate on interest income.
The highest 2007 rates for individuals look like this:
Combined (Federal/Provincial) Highest Tax Rates for 2007*
| Province |
Dividends
(Eligible) |
Dividends
(Non-eligible) |
Capital
Gains |
Interest |
| British Columbia |
18.5% |
31.5% |
21.9% |
43.7% |
| Alberta |
17.5% |
25.2% |
19.5% |
39.0% |
| Saskatchewan |
20.4% |
30.8% |
22.0% |
44.0% |
| Manitoba |
23.8% |
36.8% |
23.2% |
46.4% |
| Ontario |
24.6% |
31.3% |
23.2% |
46.4% |
| Quebec |
29.7% |
36.4% |
24.1% |
48.2% |
| New Brunswick |
23.0% |
37.3% |
23.4% |
46.8% |
| Nova Scotia |
28.4% |
33.1% |
24.1% |
48.3% |
| P.E.I. |
24.4% |
33.6% |
23.7% |
47.4% |
| Newfoundland |
32.5% |
37.3% |
24.3% |
48.6% |
Appreciating these tax differences helps design the investment mix right for you. A mix that focuses on after-tax investment returns.
A tax friendly strategy puts a little more in your pocket. After all, it’s what you keep that really counts.
2. Tax smart saving
Also appreciate the before-tax and after-tax costs of deductible vs. non-deductible borrowings. Make every effort to minimize the non-deductible costs.
A 6% non-deductible interest rate really costs 9.2% before-taxes in the 35% tax bracket. Conversely, a 6% deductible loan costs 3.9% after-taxes. That is a substantial difference.
Pay off non-deductible loans quickly. Focus on credit cards and the mortgage. Try to reduce the mortgage amortization from 25 years to 10 or 15 years. It saves a bundle of interest.
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Having a good grasp of these two areas gets to the heart of the matter of the investment game plan. It provides the roadmap to these specific questions:
- Where is it best to incur risk – personally or within the registered accounts?
- When should personal and registered account investing be pursued?
- Which type of investment income is best received personally and in registered accounts?
A tax smart strategy for saving and investing delivers value to the accumulation and preservation of the precious nestegg. Added value is a bonus, no matter how you slice it.
I welcome your questions, comments and opinions.
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