The most interesting and exciting investing and financial planning stratgies to consider today include:

 

• Intergenerational Tax Planning Using A Testamentary Trust:  When the second of both spouses’s die, typically at an older age, her remaining assets will go to her grown adult children.  In many cases the adult children are already earning a good income, so when the inheritance money arrives the investment income from these investments is taxed at the highest rates of tax on the heir’s tax return.  Alternatively, through the Will, mom and dad could direct to have their assets placed into a testamentary trust.  The investment income earned inside the trust could be taxed at tax rates that are lower than the personal tax rates.   Over his or her remaining life time, the heir could save tens of thousands of dollars, or more, in taxes.

This is a very simple, yet powerful stategy to use in situations where the individual inheritance is expected to be $250,000 or more and the heir is typically in a higher tax bracket.  There are many other provisions that can also be added to the trust that can restrict or enhance the flexibility in the use of these funds. This strategy must be implemented in the Will prior to one’s death. 

• Personal Tax Saving Strategy for the Small Business Owner:  The new Tax Free Savings Account creates some interesting opportunities to accumulate long term wealth in a tax efficient manner.  For those who own a small business, for example, it may be prudent to reduce  personal salary income in favour of paying out dividends.  Historically, the downside to paying out dividend income rather than salary was due to the fact that dividend income does not create RRSP contribution room.  Alternatively, with the new Tax Free Savings Account available today the small business owner may be able to reduce personal income while also setting aside long term savings in a tax sheltered manner.

 

• The Tax Free Savings Account (TFSA):  Launched January 1, 2009, by the Federal Government, this is a very exciting and beneficial investment structure that may one day be even more important than the RRSP.  The money invested in the TFSA is after-tax.  Yet, from this point forward any and all investment income earned in the account is completely tax free.  In the future, should you need to take money out of the account, you will not pay any tax on the growth in the value (ie:  the capital gain).

For those who are retired in the future, this means that they can have a source of regular income that they will pay no tax on in the future.  This will also help people save for other large expenditures such as a home. The maximum annual contribution is $5000 per spouse.

• The TFSA and the Retired Individual:  We know that it is extremely important to efficiently manage taxes in retirement (see Master Your Retirement in my on-line store).  By having a somewhat significant amount of money in the TFSA by the time you retire you have the flexibility to draw a significant amount of tax-free income if and when required.  This could help you save a significant amount of income tax while also giving you the flexibility to draw down your RRSP / RRIF income in the most advantageous manner over time.

•  Investing In Turbulent Times:  During times such as these, one of the most important investment themes is one that is focused on “yield”.  You want to be “paid” interest and dividend income while you “wait” for the stock market to gain its footing and begin to grow.  The bad news in this environment is that interest rates have been reduced significantly so as to help the economy grow.  This means that income earned in high interest savings accounts, bonds or GIC’s will not be that significant.  The good news is that dividend income from blue chip Canadian firms is in the 6% to 8% range.  This is substantially more than the 2% to 3% range of just 18 months ago.  A significant dividend will help to cushion future losses or add to future gains.  Even a 2% gain in the value of the investment, when combined with a 6% dividend, can create a very attractive 8% return. However, it is also important to recognize that the size of the yield can be an indicator of risk.  When investing for yield it is also important to ensure that fees or other expenses are as low as possible to maximize the benefit of this strategy.

 

•  International Investing:  When sizing up your portfolio today it may appear prudent to reduce your risk and invest globally.  Yet, from a Canadian investor point of view, you need to make sure you land on the right side of the currency trade.  For example, if between today and the day you decide to sell the investment the value of the international currency falls in value when compared to the Canadian dollar, you will suffer from a “currency loss”.  The Canadian currency will have gained ground against the currency in which your foreign investment was held.  While it can be very difficult to effectively “trade” currencies over time, when looking at the value of the Canadian dollar today in relation to the US dollar, it seems that the Canadian currency is just as likely to rise against the value of the US dollar than fall.  Therefore, why invest internationally unless the currency is clearly on your side?  The best time to invest internationally is when it appears the Canadian dollar will drop in value compared to the international currency.  Based on an 80 cent dollar today, it would appear that today is NOT one of those times.