Make sure you’re getting good advice

Recently, I exchanged several e-mails with a member of my Internet Wealth Builder newsletter who was concerned about the tax guidance she was receiving from her financial advisor. The issue was maximizing the tax-efficiency of registered and non-registered accounts.

It began when she complained to me that her financial advisor said that since she had “only $150,000” invested, tax optimization didn’t much matter and she should not be concerned about it. I replied that it could indeed matter, to the extent of several hundred dollars in tax savings depending on the securities in her account and the way they were divided between the portfolios. I suggested that the member discuss the matter further with the advisor. Here is her response after that discussion.

“Last week I sent you a question about what to hold inside and outside an RRSP and said that my tax advisor had said I don’t have enough to worry about it. You suggested I talk to her. I did. Her answer was: ‘The only people who need to worry about that are people with say half a million in GICs; then those people need to think about doing something different to get better tax advantages. If you are goingo hold equities and bonds like you do, with an emphasis on equities, then it doesn’t really matter that much.’ 

“Isn’t that an interesting answer? I would think that no matter how much money you have, you should position yourself so as to get the best tax advantage.

“I know the basics – hold equities outside and fixed-income securities inside an RRSP. But I don’t know about tax advantages with income trusts. Is there any reading material you can suggest? Or is it time to start thinking about changing advisors?” – C.A., Alberta

Indeed it was an interesting answer and I might almost say a flippant one. But it is hard for me to judge just how much tax C.A. might be in a position to save by doing some portfolio swaps since I don’t know the composition of her RRSP and non-registered accounts.

It should be fairly easy for her to do a rough estimate, however. All she has to do is to see how much interest income she earned in the non-registered portfolio in 2003 and apply her marginal tax rate to it. If she has RRSP assets in equities and income trusts that match or exceed the non-registered interest-bearing securities, she could reduce that tax liability by doing a switch. The maximum tax rate on interest income in Alberta in 2003 was 39 per cent, whereas it was 24 per cent on dividends and 19.5 per cent on capital gains. As for income trusts, some of them pay a significant portion of their distributions in tax-deferred return of capital. Investors can check out the exact percentages at the websites of the trusts they own.

I have run into situations like this before and on occasion the tax-saving potential of a little portfolio reorganization was in the thousands of dollars. This latest example is just one more reminder of the need to be vigilant in dealing with financial advisors. Most are very conscientious about maximizing clients’ after-tax returns but there are mediocre performers in every profession. If you have both registered and non-registered accounts, take a little time to satisfy yourself that they have been structured in the most tax-effective way.

This article originally appeared in the Internet Wealth Builder.