Alpha tax is an investment strategy that could increase your income


The method of choosing assets to try to reduce your tax bill is still new in Canada

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To get the best returns from your investment portfolio, it is not enough to choose the right stocks, properties or funds in which to invest your money.


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Asset selection is an undeniably important – and often fun – part of investing, but ignoring the tax implications of your investment choices until later in the process could hurt your short-term returns and hinder investment. long-term growth of your portfolio.

Instead, some advisers suggest you explore the tax ramifications of your asset choices. before make purchases, move forward with the goal of lowering your annual tax bill and therefore maximizing your overall income.

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This first tax planning strategy is known as tax alpha. This is how it works.

What tax alpha is not

Tax alpha is not a common term in Canada, says Rebecca Hett, vice president of taxation, retirement and estate planning at CI Investments in Calgary. So far it has become much more important in the United States


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But Canadians are familiar with the concept of holistic financial planning. Think of tax alpha as a possible component of an overall financial plan.

“This is an opportunity for an investor to outperform regular market performance using tax savings or tax-advantaged strategies,” says Hett.

Some investors with a basic understanding of tax alpha think it’s little more than harvesting tax losses, Hett says, but the concept goes beyond selling investments at a loss to offset capital gains.

“That’s just one aspect of it,” she says.

“Harvesting tax losses can lead to additional returns over time due to tax efficiency, but it’s really best supported when you have volatile markets and you’ll find yourself in a low tax bracket. future that is not higher than where you are now. “


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Tax alpha, on the other hand, is a strategy that you can use regularly throughout life.

The tax alpha strategy for your investments

The first step in a tax alpha approach is a traditional early-stage planning task: determining your long-term financial goals and risk tolerance.

Once the planning steps are complete, your advisors use their understanding of tax law and financial products to choose the combination of assets and accounts that will result in tax-efficient investment choices.

Alpha Tax Portfolios reflect an understanding of how different forms of income are taxed, what funds you should use to pay off which assets, and the role that withholding taxes play in your portfolio performance.

Let’s say you have a soft spot for actively managed mutual funds. With a tax alpha strategy, your advisors might explain that opting for index investments, such as exchange-traded index funds, might be more tax-efficient, as ETFs typically have less turnover in their investments. their asset mix. Lower turnover can minimize capital gains distributions, which can lead to improved after-tax performance and long-term tax efficiency.


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Since alpha tax investing can be a complex process that encompasses all of your finances, strategizing should involve your accountant or tax advisor, your investment advisor and, when estate planning comes into play, your lawyer.

But Hett says some Canadians, those who understand tax law and have the time and inclination to do their own meticulous bookkeeping, may have the tools to make tax alpha a reality for themselves.

“I think a lot of astute Canadians can save a lot of tax on their own,” she says.

“But when you start to deal with more sophisticated aspects, such as harvesting tax losses or understanding the nuances between different types of investment strategies when dealing with fund structures, I think the financial advisor has a important role to play. to play.”


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But tax alpha has its simpler aspects, such as consolidating investments and making your financial affairs easier to follow.

What is the potential gain?

Since tax alpha means a different set of strategies for each investor, it’s impossible to put a dollar figure on how much the average person might be able to reduce the taxes owed.

And Jason Pereira, partner and senior financial consultant at Woodgate Financial in Toronto, warns that while tax alpha is a good idea in theory, it doesn’t always translate into benefits for all investors.

“The idea is that you locate certain investments with certain types of income in certain accounts to minimize taxes,” he says. “The problem is that the optimal allocation is very sensitive to assumptions about future returns, and since we cannot know the future, the result can be positive or negative.”


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If slight deviations in assumptions end up triggering drastic differences in asset allocation, Pereira says, fiscal alpha “becomes impractical.”

However, Hett says investors will be better off if they make the effort to lower their taxes without having to pay additional professional, advisory, or market execution fees.

“You’ll always do better when you make the right tax decisions. “

She describes the gist: “You see claims in the market that tax alpha can increase returns by one percent a year, maybe a little north of that. In reality, it comes down to the volatility of the market and the tax bracket the investor is in, both when executing the strategy and when planning to realize the tax they may have. -be postponed, ”says Hett.

One to two percent? Is all this work worth it?

“Absolutely,” Hett said.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.



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