FP Answers: What’s the most tax efficient way to draw down my $5-million investment portfolio?
If we’re entering a prolonged inflationary period, you may be best to preserve and grow your capital as much as you can
By Julie Cazzin with Allan Norman
Q: I am 65 years old and my wife and I have pensions that total $95,000 per year plus a non-registered portfolio of $5 million that annually generates $95,000 in dividends. There is $2.3 million in unrealized capital gains in this non-registered account. We also have $2.5 million in registered retirement savings plans (RRSPs) and $240,000 in tax-free savings accounts (TFSAs). I am concerned the capital gains inclusion rate is going to go up from 50 per cent to 75 per cent, so I am thinking of crystalizing the capital gains on half of my investments this year by selling some equities. What do you think? I’d also like your opinion on the best drawdown strategy. Our current pension plus dividend income is enough for us, and we occasionally gift some money to our three kids. — Bob in Ontario
Think about the mortgage you took out 30 years ago. I bet it seemed like a lot of debt at the time. I’m guessing if you took on the same level of debt today, it wouldn’t seem so big. This is an example of using inflation to shrink debt. If we’re entering a prolonged inflationary period, you may be best to preserve and grow your capital as much as you can.
Selling half of your non-registered investments today and repurchasing different investments, or waiting 30 days to repurchase the same investments, means paying an extra $252,000 in tax — shrinking your investments by $252,000. Modelling this, I can see a relatively small advantage by selling today if the inclusion rate rises to 75 per cent and stays there, you live another 30 years, and I don’t consider changing inflation rates.