The article “These money-saving strategies can help investors make the most of a very bad year” was originally published in Financial Post on October 3, 2022.
Jason Heath: You can earn a guaranteed return on your investments whether markets rise or fall
Investor sentiment is very different this year compared to 2021 when North American stocks returned more than 25 per cent. As we enter the fourth quarter of 2022, there are a number of investment strategies to consider, some of which are specific to this year, while others might be considered timeless.
If you are relatively well-versed in personal finance, this first set of strategies may be familiar ones. Regardless, it might not hurt to have a refresher.
Stocks, bonds and cryptocurrency have all seen steep losses in 2022. For investors with taxable accounts, they can sell their losers to trigger capital losses. Capital losses can be deducted against capital gains on your tax return in the current year but if you have more losses than gains, a net capital loss for the year can be carried back up to three tax years.
The past three years have been relatively good to investors, so many with non-registered investment accounts had capital gains over that time that can be offset with 2022 losses.
Spouses can even take advantage of a tax loophole to transfer capital losses between them if it is advantageous. If you have unrealized capital losses on an investment that could be used by your spouse to offset realized capital gains from the past three years, there is a method to transfer them by using the superficial loss rule strategically.
This rule is generally a punitive one meant to deny a taxpayer’s loss. If you sell an investment for a loss and you or your spouse buys that investment back within 30 days (before or afterwards), the loss is generally denied. Their adjusted cost base then becomes your original cost, not the price at which they purchase the investment. You can use this to effectively transfer a loss to a spouse by selling an investment now at a loss and then having your spouse buy back the same investment. As long as they wait 30 days, they can sell and claim the loss on their tax return instead.
If you are lucky enough to still have a deferred capital gain for an investment in your non-registered account, there is a way for philanthropic investors to avoid that tax altogether. If you donate shares, mutual fund units, exchange traded fund units, or similar investments to a charity, you do not have to pay tax on the deferred capital gain. In addition, you also get a tax slip for the fair market value of the investment at the time of the donation to claim for a tax credit. Many charities accept a donation of securities in this way. It may not be worth the paperwork to make a $100 donation, but for larger donations into the thousands, there could be thousands of dollars of capital gains tax avoided.
RRSP/RRIF planning
Tax-free savings accounts (TFSAs) are flexible accounts that can be used for different purposes. If you have a TFSA and you have RRSP room, you can use TFSA withdrawals to fund RRSP contributions.
As a very general guideline, I would probably not contribute to an RRSP if your taxable income is below about $50,000 unless you have an employer matching contribution. If your income is higher, especially if you expect to be in a lower tax bracket in retirement, consider using TFSA withdrawals to fund your RRSP.
For every $100 that you contribute to an RRSP, you might save $25 to $50 of tax, depending on your income and province or territory of residence. If you use your TFSA to make these contributions, you can turn around and recontribute the tax refund to your TFSA. It is an easy way to turn $100 of investments into $125 to $150.
Retirees with RRSPs and RRIFs should not necessarily base their retirement account withdrawals on the age 71 conversion deadline or the annual government RRIF minimums. Early withdrawals can allow one to take advantage of low tax brackets, smooth a retiree’s income in retirement and save tax on death.
A down year for stocks could be an even more compelling opportunity to take optional withdrawals at a low point — resulting in less tax — and contribute to a TFSA, where a future recovery can grow tax free.
RESP strategies
Parents with registered education savings plans (RESPs) can also magically grow their wealth by tapping their TFSAs. A TFSA withdrawal to fund an RESP contribution may not generate a tax refund, but it can result in a 20 per cent federal grant and potentially other income-dependent federal or provincial incentives.
Even if those with post-secondary-age kids do not have a TFSA or other savings to use for a contribution, another option may be a line of credit. I am not a big fan of borrowing to invest, especially as interest rates continue to rise, but this may be a short-term exception.
If you have a child in Grade 11 or 12 (ages 16 or 17), it could be worth it to use your line of credit to catch up on any missed RESP grants. You may pay interest of five to six per cent on the borrowed funds, but the government grant of 20 per cent may be worth the interest cost for a year or two.
Better yet, if you have a family RESP and younger kids under age 18 who still qualify for RESP grants, and an older child already going to college or university, you can use a line of credit to contribute and then withdraw funds to pay down the line of credit. In this way, you can borrow $100, contribute it to an RESP, and turn it into $120 with the 20 per cent grant, then withdraw $100 to pay off the line of credit. You come out $20 ahead.
Corporate savings
Business owners with accumulated corporate savings may benefit from withdrawing money to contribute to their TFSA accounts — if they are not already maxed out and have no non-registered savings. This is especially true for those who are not in the top tax bracket, as well as those who are more conservative investors.
This is arguably a good time to consider this strategy as well given stocks are on sale. The personal income inclusion on the withdrawal could be lower if funded by selling investments that have declined in value, and the upside potential, tax free in a TFSA, may be advantageous in the long run.
The same argument could be made for RRSP contributions. Business owners with RRSP room may also benefit from the lower personal tax rate on paying after-tax corporate savings out as dividends, which are taxed at a lower rate than salary. A dollar of RRSP contributions may save 10 to 20 per cent more tax than the tax payable on a dollar of corporate dividends, presenting an arbitrage opportunity.
Summary
Outsmarting the stock market is tough to do. Investors with a long time horizon will generally be successful but a down year here and there is bound to happen. This year has been especially brutal because bonds have not provided a cushion for diversified portfolios.
To the extent you can exploit some of the above opportunities, you can earn a guaranteed return on your investments whether markets rise or fall.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.
