Tired of taxes? Think long term

It is April 30 as I sit at my computer and write this column for CARPNews. I am exhausted and numb, having just finished my tax return for yet another year.

The exhaustion comes from the many hours sorting through numerous T slips, statements and schedules that have become part of our unbelievably complex tax system. If it were not for computer processing, it would be even more difficult.

The numbness comes from writing the cheque for the amount I ended up owing. Every year I make the quarterly instalments and every year the balance on filing still comes as a paralysing shock. My mistake this time was that in 1996, I foolishly realized some capital gains that had accumulated on my savings over the years, and a major part of the proceeds went to Ottawa to buy your votes in the recent election campaign. I sold some things because I thought it was timely to do so from an investment point of view, but now I have paid the price — the devastation of my savings due to taxation.

Which brings me to an important tax deferral technique I have resolved to use more effectively from now on: Don’t realize capital gains unless you absolutely have to. Do realize losses on timely basis to offset gains you can’t avoid each year. For an investor, this is one of the best discretionary tax planning techniques still available.

The first step in using this tax deferral method is to invest in things for the very long-term. Buy stocks you can hold forever, in the Warren Buffett style, such as utilities and other blue chips that pay dividends and raise them regularly. With these kinds of investments you can hold on to them year after year, collect dividends and accumulate some increase in your net worth on a tax-deferred basis. This is almost as good as having your savings in an RRSP or RRIF, but there is no maturity at age 69 as with an RRSP, and no minimum withdrawal every year as with a RRIF.

I receive and read regularly a number of investment advisory newsletters that help people pursue a "buy and hold" investment strategy. The trick is, of course, knowing what and when to buy. As they say, in any commercial endeavour, everything depends on buying right. If you buy right you can’t lose, and if you buy wrong you can’t win. Forget about selling high; you will just end up paying a lot in taxes.

One of my favourite investment advisory newsletters is The Connolly Report published by Tom Connolly at 188 King St. E., Cobourg, Ont., K9A 1L5. He has a system for buying the right utilities and other high-yielding stocks at the right time, the kinds of stocks you can hold forever. There are other advisories in the U.S. that use similar methods but as far as I know, Tom’s investment letter is unique in Canada.

If your investment preference runs to mutual funds, some are operated to defer taxes and some are not. For example, I have a similar amount invested in each of the Altamira Equity Fund and the GBC Canadian Growth Fund. Both performed fairly well from an investment point of view in 1996, with GBC doing a bit better — you can check this out in the mutual fund reports in the financial newspapers. However, Altamira Equity, which traded a lot throughout the year, allocated me a hefty taxable capital gain for the year on a T3 slip. This cost me dearly on my tax return. In contrast, GBC Canadian Growth Fund, which adopts a buy and hold investment strategy, which resulted in no T3 at all for 1996. It makes a big difference when you write that tax cheque on April 30.

My June newsletter deals again with the government’s Seniors Benefit proposals, showing how it would affect both single seniors and couples in different income categories, and how these people would fare under the seniors benefit in comparison with the existing OAS. Also, whether you should elect the Seniors Benefit or stay on the OAS if you were born before December 31, 1935. The Seniors Benefit would be anything but a benefit for people now in their 50s through 61, and people in this category can’t be warned too much.

For a copy please send $5 to cover production and mailing costs, to: Donald I. Beach & Associates Inc., 2555 Highway 7, Greenwood, Ont., L0H 1H0.