How to Save Some Tax Dollars on Your Investments

Want to Reduce Your Taxes?

Mutual Funds are the most common investment Canadians hold. Here is one of many reasons why you may want to look at alternative options.

To first understand how this tax savings can work, you need to understand how mutual funds charge you with their fees.

Every mutual fund has an embedded fee called an MER (Management Expense Ratio) and the average fund fee in Canada is somewhere around 2.20%. Each fund is different however and some institutions have lower fees than others.
This means that 2.20% is pulled out of your account every single year and you don't really see it happening, because your return will show what has happened NET of these fees.

These fees are used to pay for everything associated with the fund. It pays the Fund Manager, The Advisor, The Branch and the Corporation that owns the fund.

For my example, I will have to use a relatively wealthy person to explain how one can save tax dollars, because it only works if they own mutual funds in a non-registered account.

Jimmy Has $1,000,000 invested in Mutual Funds

Jimmy has done a good job of saving and he has $500,000 in his RRSP and $500,000 in a Non-Registered Portfolio.

Jimmy has been working with an advisor at a bank branch and has all of his money in that bank's mutual fund portfolios. He is being charged 2.20% in MERs on these funds, so he is paying $22,000/year in fees to the bank, the advisor, the fund managers and the branch.

Jimmy Decides to Give K4 Financial a Chance

Kent helps Jimmy move his portfolio over to WealthSimple. His fees have automatically been reduced from $22,000/year to $11,500/year, which is fantastic, but that's not the point of this blog.

How is Jimmy charged at WealthSimple is important.

Jimmy has fund fees (MERs) of 0.20% on his ETF portfolio.

WealthSimple charges 0.35% to build and manage his investment portfolio.

K4 Financial (Kent) is paid an Advisor referral fee of 0.60%.

My fee is separate from everything else, which is very important in this case, because I am being paid $6,000/year to be Jimmy's financial planner.

This does not matter with regard to his RRSP, because the income generated inside of the RRSP is tax-deferred, but the non-registered portfolio generates taxable income every year (as long as it goes up that is). And every time you make money by investing in anything, you are allowed to write-off any professional fees you might be paying in order to help you make money.

In this case, Jimmy has $500,000 invested in his Non-Registered portfolio, so he is paying an advisor fee of $3,000/year to me to give him financial planning advice.

Jimmy is allowed to include this amount when he files his taxes to reduce his overall tax bill. 

So, if Jimmy had a 3.0% return on his investment and made $15,000 in interest income, usually he would have to pay tax on that extra $15,000 he made, but since I was paid $3,000, he can use my fee against his earnings and now he only has to pay tax on $12,000 worth of earnings.

If Jimmy is in a 40% tax bracket, he has just saved $1,200 in taxes in this year alone, not to mention reducing his investment fees by $10,500. He just saved $11,700 in one year by taking a couple hours of his time to build and implement a comprehensive financial plan with Kent.

Kent TilleyComment