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24 lacible | Octobre 2020 FEATURE ARTICLE David Truong CIWM, F.Pl., M. Fisc. Advisor, Expertise Center National Bank Private Banking 1859 TAX OPTIMIZATION: THE HOLY GRAIL! The optimization of investment taxes is the Holy Grail of the financial industry. It tries to improve the overall net return on the portfolio by prioritizing the investment of certain asset classes in various savings vehicles while still aligning with the investor's profile. This means that the tax optimization strategy must be analyzed after taxes, like the asset allocation. Basic Parameters Let 's take the example of a total portfolio of $400,000 divided equally into four different accounts: an RRSP, a TFSA, a non-registered account (NR) and a holding account. The first step, before even considering tax optimization, is to allocate the total net amount based on the investor profile. Assuming the maximum tax rate and a zero balance for the corporate tax accounts, the total net after-tax amount is $298,670, which will be allocated based on the investor profile. With a balanced profile, we get we get the results shown in Table 1 below.: If we do not try to optimize the investment taxes, the process stops here, and we apply the same asset allocation for each of the after-tax entities (see Table 2 below). For the basic projection, we apply the return assumptions based on the IQPF and FP Canada Projection Assumption Guidelines (3.80% after deducting management fees of 1.00%) with annual rebalancing. We used a 25% component on the return on equities for the dividends and a 15% income tax recovery on foreign income, if any. Finally, because we want to obtain the net after-tax value, we took into consideration the holding tax accounts, which will increase each year based on the type of income (CDA, RDTOH, NERDTOH and GRIP; see Table 3). Without tax optimization, we get a total net worth of $601,567 after 20 years. This value will be our reference amount to determine whether tax optimization creates additional value for the portfolio. If the decision is made to go ahead with tax optimization, we have to find the optimal combination of assets and accounts – in other words, we have to determine the order of asset class allocation and the order in which the accounts will be used. For example, we might decide to prioritize the investment of fixed-income securities in the RRSP, which will be Gross amount Net amount Assets Profile Net amount RRSP $100,000 $46,690 Cash 5% $14,934 TFSA $100,000 $100,000 Fixed-income securities 35% $104,535 NR $100,000 $100,000 Preferred shares 5% $14,934 HOLDING $100,000 $51,980 Cdn. equities 15% $44,801 Total $400,000 $298,670 US equities 35% $104,535 Int. equities 5% $14,934 Total 100% $298,670 Year 0 NET AMOUNT (BEGIN) Allocation after income taxes RRSP TFSA NR HOLDING Total Cash $2,335 $5,000 $5,000 $2,599 $14,934 5% Fixed-income securities $16,342 $35,000 $35,000 $18,193 $104,535 35% Preferred shares $2,335 $5,000 $5,000 $2,599 $14,934 5% Cdn. equities $7,004 $15,000 $15,000 $7,797 $44,801 15% US equities $16,342 $35,000 $35,000 $18,193 $104,535 35% Int. equities $2,335 $5,000 $5,000 $2,599 $14,934 5% Total $46,690 $100,000 $100,000 $51,980 $298,670 100% Table 1 Table 2

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