27
value of $27,270 (4.53% more than the reference
scenario) by structuring the portfolio based on a
specific order of asset classes and accounts. The
added value is equal to additional after-tax return
of 0.22% per year.
The combination that allows this maximum after-
tax value to be achieved is as follows:
Part of the outcome is explained by the low interest
rate and the preferential tax treatment of Canadian
dividends. It is best to put preferred shares and fixed-
income securities into the non-registered account.
Then we should prioritize the investment of equities in
Order of asset classes Order of accounts
1- Preferred shares 1- Non-registered
2- Fixed-income securities 2- TFSA
3- US equities 3- RRSP
4- International equities 4- Holding
5- Canadian equities
tax-free or deferred tax accounts (TFSA and RRSP),
since rebalancing triggers a capital gain each year. But
you should avoid holding international and US equities
in the holding account, because taxation is higher on
foreign dividends than on Canadian dividends.
Another point to note is that the average of the 2,880
scenarios is similar to our base scenario. This means
that distributing the investments equally among all
the accounts is not the very worst scenario.
The worst outcome would be to put the preferred
shares and fixed-income securities in the holding
account and then in the RRSPs and to put the US
and international equities in the non-registered
account, despite the recovery of foreign income tax.
Conclusion
The goal of tax optimization is to find the highest
after-tax value at a given moment. It can create
additional value if it is wielded properly, but even
though there may be some similarities, the optimal
combination is not the same for everyone and
depends on the amounts available in each account.
For example, TFSA rights are created annually, which
could change the asset allocation in each account.
Another major challenge for tax optimization strategies
is behavioural finance. It is hard for clients to interpret
the different returns in each account. Instead, you have
to look at the portfolio's overall return.
Rebalancing also weighs down the administrative
task. You have to be able to rebalance the overall
portfolio based on target allocations, not by account.
By judiciously applying this decision-making tree,
however, you can improve the overall return of the
client's portfolio without exposing them to higher risk.
FEATURE ARTICLE
Présenté par :
