If your clients are ready to start drawing income from their investments, they may be surprised to know how much they may lose to taxes. Show your clients a more tax-effective way to access their money – and how they can maximize the amount they take home.
Different forms of distributions come with different levels of taxation, which can have a major impact on the after-tax value of your clients’ withdrawals. A valuable tax management strategy involves taking an investment that offers the most tax-advantaged type of distribution.
Amount paid in taxes
Amount kept
47.74% of the amount is taxable, the rest is kept.
39.34% of the amount is kept, while the rest is paid in taxes.
26.76% of the amount is kept, while the rest is taxable.
100% of the amount is kept.
Top marginal tax rate in Ontario: 53.53%. Source: Ernst & Young, 2021
Return of capital (ROC) provides the most tax-effective form of distribution since it is not immediately taxable. Tax is deferred until the investor’s capital is depleted or the shares are sold.
Series T is designed to help your clients achieve their monthly cash flow needs in the form of return of capital¹, while providing their portfolio the opportunity for capital appreciation. The chart below illustrates how return of capital withdrawals from a Series T investment works.
For illustrative purposes only. Assuming 6% rate of return and 5% distribution rate.
Income from an investment in Series T will primarily consist of a return of capital distribution but may also consist of net income and/or net realized capital gains. The return of capital withdrawals will lower the capital of the investment over time. What remains in the account is any growth the investment has achieved over the years on the original investment. Any subsequent withdrawals after the capital reaches $0 are taxable in the form of capital gains, which is currently taxed at a lower rate compared to dividend or interest income.
A Series T investment allows your clients to defer the taxes on return of capital distributions they receive, and pay those taxes at a more advantageous time in the future. When your client decides to sell the investment, they will realize a larger capital gain than if they had not received return of capital distributions. However, capital gains are taxed at a lower rate than other income and your client can choose to sell when they may fall into a lower tax bracket, potentially reducing their overall tax bill.
Distributions on Series T may also consist of net income (or dividends in the case of Series T of Dynamic Corporate Class Funds) and/or net realized capital gains.
The charts below illustrate what happens to a Series T Investment over 20 years using three different hypothetical scenarios. Eventually, your clients’ capital will become $0, and what will remain in the account is the growth, or any appreciation, on the investment. However, depending on the scenario, the length of time before your capital reaches $0 will vary.
The value of your clients’ investment and the distribution they receive monthly remains constant. At the end of 20 years, the capital becomes $0, and what remains is any appreciation on their investment and this amount is taxable as capital gains.
Because the rate of return on your clients’ account outpaces the amount of the distribution, the value of their investment and the cash flow they receive monthly increases over time. As the distribution is made directly from their capital, their capital will reach $0 quicker than other scenarios – after 19 years. However, your clients’ investment will also have appreciated more than in the other scenarios, and this amount is taxable as capital gains.
Because the rate of return on your clients’ investments is lower than the distribution rate, the value of their investment and the income they receive monthly decreases slightly over time. Since they are withdrawing less capital from their account, their capital decreases more slowly than other scenarios – after 23 years. Your clients’ investment will have appreciated less than in other scenarios, and what remains in the account is taxable as capital gains.
1 The above graphs are for illustrative purposes only.
