Woman with $3.77 million in investments needs balance between private equity, GICs

79-year-old’s income largely comes from interest earned from savings and PE investments, but that’s not the best strategy

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How do I structure my investment income in retirement to minimize tax? This is the overarching question Denise would like the planners to address.

The 79-year-old’s income largely comes from the interest she earns from her savings and her private-equity (PE) investments. As a result, it can significantly swing in any given year based on the success or loss on business deals. For example, her income last year was about $111,000, but she earned about $250,000 in 2021. She’s OK with that volatility, but she isn’t with the amount of tax she pays. The year she earned $250,000, her tax bill was about $1,000 a week.

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Denise has been retired since 1978, when she officially stopped working to have and raise her children. Her family lived on a farm then, daycare was non-existent and she helped her late husband manage the business.

He passed away almost 40 years ago, and she then leased the land to a local farmer, which became her main source of income. She also started buying and selling real estate (living in each home for a few years and then selling it), which, along with the sale of the farm in 2014, helped build up her wealth.

Today, Denise outright owns her primary home in British Columbia, valued at $1.3 million, and another in the United Kingdom worth $729,000. She also has guaranteed investment certificates (worth $1.9 million), stocks ($200,000), PE ($760,000) and a $600,000 investment in a green-tech startup that is planning an initial public offering next year. If everything goes to plan, the IPO should result in a big payday.

Her expenses in retirement are minimal. She likes to read, closely follows politics, loves tennis and attended the National Bank Open in Toronto and the Laver Cup in Vancouver this year — the Laver Cup tickets ran her $5,500.

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“I thought, ‘I’m going to be 80 next year, why not?’” she said.

Denise also likes to travel, but her travel expenses this year were unusually high at $20,000. She may not do any travel in the coming year.

That said, “When I want to do something, I do it,” she said.

I never was keen on interest during my life as it is taxed at 50 per cent, but now that I’m much older, I thought interest income was the safest

Denise

She wonders if she should stop her PE investing. She has an estate plan in place, but is concerned that the nature of these investments may complicate the transfer of her wealth.

“I have eight investments right now. Sometimes I win, sometimes I lose. I am a bit of a gambler because I really don’t have anyone I need to take care of,” she said. “I never was keen on interest during my life as it is taxed at 50 per cent, but now that I’m much older, I thought interest income was the safest.”

What the experts say

Both Graeme Egan, a financial planner and portfolio manager who heads CastleBay Wealth Management in Vancouver, and Ed Rempel, a fee-for-service financial planner, tax accountant and blogger, agree Denise has accumulated more than enough wealth to last her through retirement and leave a healthy estate to her beneficiaries.

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But they also said she doesn’t need the reward, risk and hassle associated with her PE investments, especially when it comes to transitioning her estate to the next generation.

“It can be challenging to know the fair market value at any point in time of PE investments and they can be illiquid and/or subject to a delayed sales process,” Egan said. “At the other end of the spectrum, she has GICs, which pay out interest income that is not preferentially taxed in Canada, may not keep up with inflation over the long term and could incur an interest penalty to cash out before they mature.”

One potential — and extreme — recommendation: Depending on the unrealized capital gains tax implications and the time frame required to sell her PE investments, Denise could liquidate her $760,000 in PE, cash in her GICs and invest all that money in one or more high-dividend-focused exchange-traded funds (ETFs).

Egan points to the Vanguard High Dividend Yield Index ETF that currently pays a monthly dividend with an annual yield of 4.9 per cent and has a management expense ratio of 0.22 per cent.

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“This would generate approximately $10,860 each month, or $130,340 per year, without touching the capital,” he said. “After tax, this would exceed her current living expenses which are estimated to be about $65,000 per year.”

A more balanced income-generating option is that Denise could take 50 per cent of her GIC money and invest in a Canadian dividend index ETF.

“This would help to lower her annual taxes thanks to the Canadian Dividend Tax Credit and improve her after tax return/income,” Egan said. “She also has the potential of long-term capital appreciation in the ETF.”

As for an overarching tax-minimization strategy, Rempel recommends Denise target a taxable income of $107,000 ($90,000 from investments plus the $17,000 she receives from pensions) or less.

“This is about 2.4 per cent of her $3.77 million in investments and would allow her to stay in the 31 per cent or less tax bracket,” he said.

Rempel agrees with Egan when it comes to interest income: it is not the safest. “In retirement, you need a rising income with inflation. Interest is a fixed income.”

Rempel recommends Denise invest in a diversified portfolio of global or U.S. equities or stocks, such as an index ETF or mutual fund.

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“This will be far more tax efficient and can provide a higher, more reliable long-term return. She can tolerate the ups and downs, since it should be less than her high-risk investments,” he said. “If she invests for long-term growth, there should be only a little capital gains triggered yearly, with most of the tax deferred until she sells, which could be years from now.”

Rempel also suggests Denise create a retirement cash flow by selling $5,000 of her investments every month — “this is called self-made dividends” — to meet her cash-flow needs.

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“This tax-efficient strategy can give her the $70,000 to $80,000 cash flow she needs per year while keeping her tax for the year down to about $5,000,” he said.

* Name has been changed to protect privacy.


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