Get that cash working for you
Financial Post August 22, 2009
The client: A small business owner in his late 40s. His wife is in her late 40s, and they have four children ages 17 to 24. Having lived through the tech bubble and burst, he can handle risk and considers himself an aggressive investor.
The problem: The client had more than $200,000 in cash in a corporate account held by his holding company. It was just sitting there when it could — and should — have been working for him.
The fix: Tina Tehranchian, a certified financial planner for Assante Capital Management Ltd. in Richmond Hill, has managed the client’s RSPs for several years. She knew about the money he had sitting in his corporate account, which he’d been saving to buy a new property for his company.
“But then the market collapsed and he figured that was no longer the way to go,” Ms. Tehranchian says.
“But that left him with over $200,000 of cash sitting in an account that was earning less and less interest. The money was basically doing nothing.”
When there is inactive investment income within a corporation, it is taxed at a higher rate — 48.6% — versus the top rate for personal income, which is 46.4%.
Because the markets had tanked and the client’s profile was both aggressive and long term — he plans to retire at age 65 — Ms. Tehranchian realized now was the time to invest.
She kept the bulk of the money in cash, and last October invested $50,000 in an aggressive Canadian equity fund that had recently suffered a deep drop in value. By July, that investment was up 20% ($10,000).
When she realized the client had an insurance shortfall, Ms. Tehranchian purchased a universal life policy with the client’s holding company as the owner and beneficiary. She transferred $50,000 to the policy, which is held in interest-generating accounts that guarantee a 4.25% rate of return (3% annual rate of return and an additional 1.25% starting the second year).
“A rate like that is impossible to get in a GIC these days,” she says. Another $25,000 was put into a high-interest savings account, to give the client much-needed liquidity.
The rest was invested in a portfolio of mutual funds in July, most of which have a corporate class structure. Most mutual funds have a trust structure, where interest and dividends are distributed to unitholders, and any gains are taxable in their hands.
“The benefit is that any switch between the funds in that corporate tax structure is not gong to be taxable. You can move between funds freely without thinking about the taxes it will trigger,” Ms. Tehranchian says.
Because of the tax advantage, corporate class funds are better in the non-registered portion of a portfolio — any capital gains in one fund (and subsequent taxes) can be offset by losses in another. You don’t have to be an entrepreneur to buy them, either.
The result: The mutual fund portfolio is up 14%. “Because it’s a long-term strategy, neither of us is gloating,” Ms. Tehranchian says.
“We know it’s going to be a very volatile portfolio.” But the client would much rather see a volatile portfolio than a lazy one.
-75% equity (55% aggressive Canadian equity funds, 15% emerging markets, 15% medium-risk global equity fund and 15% small and mid-cap global equity)
-25% fixed income
-18% fixed (most in United Canadian Fixed Income Pool
-10% United Real Estate Investment Pool
-34% Canadian equity funds, including CI Harbour, CI Signature Select, United Cdn Equity Value, Cdn Equity Alpha and United Cdn Equity Small Cap
-20% U. S. equity
-18% international equity
CORPORATE ACCOUNT HOLDINGS (NONREGISTERED)
-23% fixed (life insurance policy)
-11% high-interest savings account