BMO Financial Group

BMO Financial Group
BMO Bank of Montreal

BMO Bank of Montreal

April 01, 2012 06:00 ET

Don't Get "Fooled" This Tax Year-BMO Provides Ideas on How to Minimize Taxes on Investments

TORONTO, ONTARIO--(Marketwire - April 1, 2012) - With today being April Fools' Day and the tax deadline approaching, BMO advises Canadians to make a resolution not to be "fooled" on how their investments are taxed. A survey commissioned by BMO shows that more than three-quarters of Canadians do not take tax implications into consideration each time they make an investment decision.

"There are many tax-saving strategies, some very simple, that Canadians can use to save money in the short and long-term," said John Waters, Vice-President and Head of Technical Expertise, BMO Nesbitt Burns. "The best strategy is to educate yourself on the options available to you, and plan ahead."

BMO offers the following ideas for minimizing taxes on investments:

  • Avoid Nasty Tax Surprises: Always keep personal tax implications in mind when making investment decisions. Speak with your financial professional about how tax rules impact your investment decisions. Make sure you understand your options.

  • Contribute to an RRSP: Contributions to a Registered Retirement Savings Plan (RRSP) are tax deductible, and the income earned in an RRSP is not taxed until it is withdrawn. This means your savings will grow faster than those held outside of an RRSP. There are several ways to optimize use of an RRSP, including maximizing your annual contribution limit and contributing to a spousal RRSP if there is a disproportionate retirement income level between you and your partner.

  • Invest in a TFSA: The Tax-Free Savings Account (TFSA) is a tax-efficient vehicle that provides the benefits of tax-sheltered savings and tax-free compounding, allowing your savings to grow. Income and withdrawals from a TFSA are tax-free; because of its flexibility, it complements other existing registered savings plans.

  • Think about income splitting: In order to lower your family's overall tax burden, income splitting allows you to spread income among family members who are taxed at a lower rate (subject to possible attribution rules). Some valid income-splitting strategies include: pension splitting between spouses or common law partners; an interest-bearing loan to family members in a lower tax bracket; and gifts to adult children or other adult family members.

  • Make your portfolio tax efficient: Because not all investments are taxed in the same manner, it is important to consider the impact of income taxes when evaluating investments for your portfolio. For example, only one-half of capital gains are taxable, whereas interest income is fully taxed at your marginal tax rate. Certain Canadian dividends also receive special tax treatment, resulting in lower effective tax rates.

  • Donate appreciated securities: One of the most tax-efficient ways to contribute to a charity is through the donation of publicly-traded securities instead of cash. When you make a qualifying donation of publicly-traded securities, the capital gains tax that usually applies to the sale of a security can be eliminated. However, investors will also receive a tax receipt for the fair market value of the securities at the time of the donation.

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