FP Answers: What's the most tax efficient way to draw down my $5-million investment portfolio? – Financial Post

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By Julie Cazzin with Allan Norman

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Q: I am 65 years old and my wife and I have pensions that total $95,000 per year plus a non-registered portfolio of $5 million that annually generates $95,000 in dividends. There is $2.3 million in unrealized capital gains in this non-registered account. We also have $2.5 million in registered retirement savings plans (RRSPs) and $240,000 in tax-free savings accounts (TFSAs). I am concerned the capital gains inclusion rate is going to go up from 50 per cent to 75 per cent, so I am thinking of crystalizing the capital gains on half of my investments this year by selling some equities. What do you think? I’d also like your opinion on the best drawdown strategy. Our current pension plus dividend income is enough for us, and we occasionally gift some money to our three kids. — Bob in Ontario

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FP Answers: Bob, it’s possible the capital gains inclusion rate will increase, but that’s been a source of speculation for years. Don’t get too focused on one thing and make a change that could later be seen as a mistake. Increasing taxes seems to be a viable option for governments given their debt loads, but what if instead they allow inflation to rise as they have in the past?

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Think about the mortgage you took out 30 years ago. I bet it seemed like a lot of debt at the time. I’m guessing if you took on the same level of debt today, it wouldn’t seem so big. This is an example of using inflation to shrink debt. If we’re entering a prolonged inflationary period, you may be best to preserve and grow your capital as much as you can.

Selling half of your non-registered investments today and repurchasing different investments, or waiting 30 days to repurchase the same investments, means paying an extra $252,000 in tax — shrinking your investments by $252,000. Modelling this, I can see a relatively small advantage by selling today if the inclusion rate rises to 75 per cent and stays there, you live another 30 years, and I don’t consider changing inflation rates.

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But what if you sell and the inclusion rate doesn’t change? That’s an “oops.” The only reason you should do this is if you need the money in the next year or two. Remember, tax-efficient investing means you want to avoid tax, defer tax and earn tax-preferred income such as capital gains and dividends.

Rather than focusing on the inclusion rate, what are your thoughts on developing a family plan? It would mean changing your mindset from accumulating more for you and your wife to accumulating more for your whole family. It’s a different mindset and not everyone wants to, or can, make the mental shift.

Think of the opportunities, though. You’ll be working with five people in different tax brackets, with different investment opportunities. Your children may still have RRSP and TFSA contribution room, and there may be government money in the form of registered education savings plan (RESP) grants.

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The time to sell some non-registered money and repurchase the same investments right away in your children’s names is when the next market crash comes. The future growth, income and tax liabilities will be in their names, not yours. Maybe the biggest benefits to family planning are preparing your children to receive a large inheritance without squandering it and seeing both them and your grandchildren flourish.

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With your pension and dividend income already supporting your lifestyle, what else do you want to do with your money? When do you want to do it?  Do you want to enhance your lifestyle, help your children or give to charity? Anything else?

Even if you start gifting money, you’re still likely to have some tax challenges with the income from your registered retirement income fund (RRIF) that you don’t need. Your best withdrawal strategy may be to let your RRIF investments grow tax sheltered and keep drawing down on your non-registered accounts. Yes, your estate will have a big tax bill, and your kids will wonder why you ever invested in RRSPs, but I think this will give you the largest after-tax estate.

Maybe it’s also worth looking at life insurance to offset the tax. Or look at trusts. A joint-partner trust will help take care of the $250,000 in probate I am projecting. If you are interested in this option, it may be time to involve your lawyer and accountant to help you with the details.

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Bob, it may make sense to start thinking in terms of family planning and consider working with a lawyer, accountant and financial planner, all in sync with what you want to achieve. Approaching your tax plan this way will likely be your best financial strategy.

Allan Norman, M.Sc., CFP, CIM, RWM, is both a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only

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