The Only Two Ways to Make Money

In my humble opinion, when one is saving for retirement there are only two powerful strategies to make money:

(a) Being smart about what to invest in, when and in which proportions; and

(b) Being smart about preserving your wealth from taxation.

Ideally, you would want to follow both paths for a "one-two punch" and get the most mileage out of each dollar invested.

As for the first Strategy, I am a neophyte and no one should trust anything I write here. I don't have a BCom, MBA, CFA, CFP etc etc. I am not a registrant with any Securities Commissions or self regulatory organization.

Alpha

For this first strategy, I personally rely on professionals who have the education, training and tools necessary to perform these (and many other) functions:

1. Rebalancing
2. Diversification
3. Tactical shift
4. Security selection due diligence
5. Risk analysis

When the first strategy is done right, one usually experiences what the industry calls 'alpha', namely additional returns above what the general market place would be able to achieve on its own without the input of the investment manager/advisor.

Most people out there that work as financial advisors or portfolio managers focus on 'alpha' because that is their 'secret sauce' and what gives them a competitive advantage over other market participants. I love 'alpha' like anyone else, but I cannot generate it.

Where our firm comes in is the Second strategy, the one whose goal is to minimize taxation everywhere possible in a legal manner using well-established statutory and regulatory rules pertaining to pension plans. Let's call that "tax-alpha".

Tax-Alpha

Tax-alpha is the result of the application of Income Tax Act rules that allow our clients to keep more of their hard earned money in their bank account instead of sending it to the Canada Revenue Agency, but in a manner that respects the spirit and letter of the law.

Tax-alpha is powerful because it does not require one to take ANY market risks to generate that newfound wealth. With alpha, there is usually some level of market risk that must be undertaken in order to move up the Risk/Reward curve. Not so with tax-alpha since the wealth created is simply a function of being able to reduce the drain caused by taxation rules.

In the case of a Personal Pension Plan ("PPP"), the tax-alpha is so significant that even when one factors in the costs of maintaining the plan in place, the savings (or sometimes tax refunds) created not only cover the annual fees, but create additional wealth that our clients get to enjoy.

14 Common Sources of Tax-alpha within a PPP

Without getting into details, here is an non-exhaustive list of ways by which PPP clients generate tax-alpha for themselves:

1. Purchase of past service (corporate tax deduction)
2. Higher annual contribution than under an RRSP.
3. Contributions to PPP & RRSP in year 1
4. Investment management fees are deductible to the corporation
5. Interest paid to lenders for borrowings used to contribute to the PPP are deductible
6. Terminal Funding accelerated contributions/deductions prior to normal retirement age
7. Ability of the corporation to sell capital property without attracting tax (due to PPP deductions) and creation of capital dividend account credits - the source of future tax free dividends!!!
8. Protection from the departure tax if client decides to become a non resident
9. Protection from the deemed disposition rules on death if children are on the plan (since they get a salary from the company)
10. Special contributions/deductions when the rate of return under the PPP is below 7.5%
11. Protection from the Passive Income Grind introduced by the relatively recent Tax On Passive Income rules.
12. Ability to purify the balance sheet of the Corporation in preparation for the eventual use of the lifetime capital gains exemption without creating immediate tax (especially if combined with No. 7 above)
13. Ability to income-split pension benefits paid by the PPP with a spouse at any age (and to also claim the $2,000 per annum pension amount credit twice each year).
14. Benefiting from the international tax treaty rate of 15% withholding rate when receiving pension income as a non-resident in about 100 countries around the world.

Conclusion

When saving for retirement, an individual must make sure that there is some level of 'alpha'. Unfortunately, too many in the financial services industry focus exclusively on alpha to the detriment of 'tax-alpha' thereby depriving their clients of significant additional resources and wealth.

If you'd like to know what your personal 'tax alpha' number looks like, contact us at: [email protected] or visit us at integris-mgt.com