You think you are doing the right thing…but are you?
Transferring securities In Kind that are at a loss into your RRSP with the hopes of claiming a capital loss.
Reality: You cannot claim a capital loss on an in-kind contribution. Furthermore, a capital gain will be triggered if you made money on the investment you transferred In Kind.
Additionally, you can’t simply sell the security, contribute the cash to your RRSP and re-buy because superficial loss rules apply.
A superficial loss can occur when you dispose of capital property for a loss and:
- you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale; and
- you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.
Holding multiples of the same accounts at different institutions.
Reality: While this is not against the rules, having multiple accounts (i.e. TFSAs, RRSPs etc.) at different institutions makes it more difficult to keep track of contribution room, results in additional fees, as well it makes managing your asset allocation much harder. Likely, little consideration is given to proper diversification when your assets are spread around at different institutions. Our recommendation: focus your money at an institution that is providing you the best risk adjusted returns for the best price.
Over contributing to a TFSA or RRSP.
Reality: CRA charges a tax of 1% on your highest excess amount in that month. Believe me, the fee adds up fast.
Using tax shelters, like flow-throughs, to reduce your tax burden; but not understanding the consequences.
Reality: Tax strategies are often marketed as a way to reduce your tax bill in a given year. The reality is that tax strategies cost you $1, then save you whatever your marginal tax rate is, say 40%. So you spend a dollar to save 40 cents. You still have 60 cents at risk. The investment only makes sense if you have a very high confidence that you will earn back the other 60 cents. There are no assurances that this will happen, and the shelters tend to be high risk to speculative investments.
Keeping money in accounts that are not tax sheltered.
Reality: Take advantage of tax efficient strategies. For example many Canadians are not maximizing their Tax Free Savings Accounts and have money sitting at the bank doing nothing; or invested in non-registered accounts that are not sheltering the gains.
The issues we’ve noted are a few of the common problems investors accidently or intentionally bring upon themselves. The bottom line is that they can all cost you at the end of the day. Managing money is about maximizing returns whether you are conservative or aggressive. A key component of performance that too often gets ignored is structuring your accounts properly to take advantage of all the benefits available while minimizing costs. If you take care of all the little pieces, big thinks happen.
Invest intelligently with all the facts. When it comes to your money - make it personal, we do.