Updated: Apr 27
Make your money last longer with this tax efficient cash-flow strategy
Brendan Greenwood CIM, QAFP, B.Comm | March 29, 2021
More creative thinking is needed to generate passive investment income in today’s ultra-low interest rate environment. Instead of seeking higher yield investments that can add unnecessary risk to your portfolio consider a return of capital strategy within a corporate class fund that can provide greater cashflow and defer tax.
Receiving return of capital first, defers the receipt of taxable investment returns and the associated tax providing greater immediate cash flow.
See the 2021 combined Federal/Ontario top marginal tax rates below:
This return of capital strategy allows taxable income to be deferred so more money can stay invested longer and grow. See example below reflecting the advantage of tax deferral.
When taxable income is eventually paid out, it receives preferential capital gains tax treatment through the corporate class structure allowing you to keep a greater portion of your investment returns. See comparative advantage of the corporate class structure in the chart below.
The strategy can be deployed with as little as $100,000. The Fidelity Investment analysis below used a $1 million dollar investment portfolio over a 7-year period to highlight the potential added value the strategy can provide for retirees seeking additional cash flow. The average annual cashflow over 7 years was 7.5% of the original principal amount invested and the closing balance of the account was approximately $2.5 million.
It’s important to remember that past performance is not a predictor of future performance and market conditions are constantly changing, so the implementation of a strategy like this should be carefully reviewed with your advisor. If you are looking for ways to tax-effectively increase your investment portfolio’s cashflow in retirement this is one option you should explore.
Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.
For other articles authored by Brendan Greenwood on issues impacting business owners and individual investors see https://www.greenwoodwealth.co/blog.
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