Person counting pennies at tax time

Benefits of Tax-Efficient Alternative Investing During Volatile Times

Table of Contents

Introduction to Tax-Efficient Investing

Recent economic volatility has put pressure on investors to find ways to protect their assets. Tax-efficient investing is a key component for mitigating volatility and maximizing investment return. A recent analysis found that the amount lost to taxes and other similar charges is one of the major factors affecting investors’ returns.1 However, with proper planning, investors can strategically minimize or defer their payable tax figure and maximize their bottom line by utilizing tax-advantaged accounts and prioritizing tax-efficient investment returns.

Why Tax Efficiency Has Never Been More Important

2022 stood out as a particularly volatile year, with significant impacts to interest rates and inflation. On December 7, 2022, the Bank of Canada announced its seventh interest rate increase of the year and the highest overnight rate of 0.50% since early 2008.2 Strategically minimizing taxable income is especially advantageous in times like these, as investors run the risk of losing the money they pay in taxes and the potential growth that money could have generated.

It is important for investors to note that after-tax returns are more important than pre-tax returns; after all, it is the after-tax dollars that investors will be spending now and in retirement.

Investment Steps to Consider for Tax Efficiency

While market volatility and high interest rates can impact the cost of living and ultimately erode investment returns, investors can take steps to reduce the total impact on their portfolios.

When making tax-efficient investments, investors should consider:

  • Opening tax-advantaged accounts like RRSPs and TFSAs to allow savings to grow tax-free and maximize earnings
  • Focusing on investments that offer the most tax-efficient returns
  • Diversifying across financial accounts and investment types with different tax treatments to increase flexibility in managing taxes
  • Consider diversifying your portfolio with private alternative investments, like the funds offered by Skyline Wealth Management, that have a lower correlation to the public markets.

Tax Efficiency Benefits for Private Alternative Investments

Private Alternative investments are generally more stable than public markets, with many offering tax benefits that investors can take advantage of. REIT’s (Real-Estate Investment Trusts are an example of a tax efficient Alternative Investment. Even if a REIT investment is not held within a TFSA, RRSP, or RRIF account, many investors find the REIT-specific tax rules to be advantageous.

Distribution types with preferred tax treatment or ones that allow for tax deferral can be powerful for growing investments and maximizing after-tax returns. An investment that provides value growth, capital gains returns, or ROC, such as REITs, may result in a much better overall after-tax return compared to investments providing only interest or other income distributions, even if they have a higher pre-tax percentage return.

Failing to match investments to cash flow needs can also be ineffective for investors and trigger costly tax and investment results. For investors requiring cash flow, selling or redeeming investments to provide cash flow can trigger tax consequences and may not maximize the investment growth potential that could result from better timing of investment sale or redemption. Investments providing regular distributions, especially ROC, could benefit investors through meeting cash flow needs and providing tax deferral. Conversely, investors who do not require short-term cash flow may benefit from investments with greater growth potential rather than distributions or setting up those investments for a distribution reinvestment plan (DRIP) to convert any distribution into more investment ownership.

Skyline Wealth Management Private Alternative Investment Offerings

Skyline Wealth Management offers four institutional-quality alternative investments, all grounded in real assets. Each product is a private investment and therefore does not trade in the public market space. With Skyline Funds, you benefit from an investment that has the potential to grow in equity, provides regular cash distributions, and offers an easy-to-use DRIP system for those looking for greater long-term growth potential.

  • Skyline Apartment REIT – professionally-managed apartment properties in secondary and tertiary Canadian markets, with an annualized 3-year return rate of 20.33% and a return rate of 14.50% since inception
  • Skyline Industrial REIT – professionally-managed light industrial properties along major Canadian transportation corridors, with a focus on logistics and warehousing; an annualized 3-year return rate of 30.97% and a return rate of 16.73% since inception
  • Skyline Retail REIT – professionally-managed retail properties in secondary and tertiary Canadian markets, with a focus on ‘everyday essential’ brands; an annualized 3-year return rate of 14.21% and a return rate of 13.12% since inception
  • Skyline Clean Energy Fund – professionally-maintained clean energy producing assets across Ontario , with an annualized 3-year return rate of 8.87% and a return rate of 8.68% since inception

 

Contact a Skyline Advisor

 

1 Schwab.com. (n.d.). Tax-efficient investing: Why is it important? Schwab Brokerage. Retrieved January 12, 2023, from https://www.schwab.com/learn/story/tax-efficient-investing-why-is-it-important
2 Bank of Canada Interest Rate 1935-2022 & 2022 forecast. 1935-2022 & 2022 Forecast | WOWA.ca. (n.d.). Retrieved January 24, 2023, from https://wowa.ca/bank-of-canada-interest-rate

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