Hate taxes? Develop a tax-efficient portfolio

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Stocks are common investments if you want to grow your money or earn extra income. While the stock market is not without its risks, you can reap profits with the right investment choices.

Most income investors choose dividend stocks to generate recurring income streams. Others prefer non-dividend payers with huge upside potential for higher capital gains. But whether you own dividends or common stock, there are tax consequences.

Dividend income

Income investors receive a distribution from the companies in the form of dividends. Under the current dividend tax system, the gross-up rates for eligible and non-eligible dividends are 38% and 15%, respectively.

However, the marginal dividend tax rate is a percentage of the actual dividends received, not the grossed-up taxable amount. Canadians can defer paying tax on dividend income by holding the shares in a registered retirement savings plan (RRSP). Your income grows tax free until you withdraw the funds.

For risk averse investors

Emera (TSX: EMA), for example, is a perpetual choice of dividend investors. At $ 59.19 a share, the $ 15.18 billion energy and utilities company is paying a lucrative 4.31% dividend. All quarterly dividends are taxed each time. If you want to avoid taxes or pay no tax on dividends, keep utility stocks in your Tax-Free Savings Account (TFSA).

Utility stocks are defensive assets preferred by risk averse investors. Emera also has a strong history of dividend growth. Management plans to increase dividends by 4-5% per annum through 2022. The target is achievable as the company derives revenue from utilities at regulated rates and therefore the cash flow is predictable.

Emera’s portfolio of regulated utilities is the engine of growth. With a $ 7.4 billion investment program in place, management expects its average rating base to increase by 2023. Emera’s US operations account for 60% of revenue, while the rest comes from the country of origin.

Capital gains

There are three main types of investment income in Canada. Dividends come first, followed by capital gains and interest income. Long-term compound interest investments include bonds, treasury bills and GICs, and they are not tax exempt. Tax experts recommend holding them in an RRSP or TFSA.

For stocks without dividends, investors only realize capital gains after selling the stock or asset. However, your capital gains are taxable. Some investors prefer to invest in growth stocks because capital gains are taxed at a lower rate than interest and dividends.

AcuityAds Holding (TSX: AT) (NASDAQ: ATY) is emerging as one of TSX’s tech superstars. The growth stock has had an excellent performance over the past 12 months. At $ 9.19 per share, the one-year price return is 164.08%. As of September 21, 2021, stocks were down 35.7% year-to-date.

If you had invested $ 10,000 on December 31, 2020, your money would be worth $ 6,431.07 today. If you sell the stock to reduce losses, you will incur a capital loss if you sell below your purchase price. Assuming you incur more losses than gains in a year, you can carry the net loss forward for three tax years to reduce net capital gains.

The $ 555.55 million tech company provides digital media solutions, a high growth business. Market analysts recommend a strong buy rating, despite the underperformance. They expect a 120% capital gain in the next 12 months.

Tax-efficient portfolio

Financial experts advise against choosing investments solely on the basis of taxation. Invest in various types of investments to develop a tax-efficient portfolio.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We are straight! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer, so we post sometimes articles that may not conform to recommendations, rankings or other content. .

Foolish contributor Christopher Liew has no position on any of the stocks mentioned. The Motley Fool owns stock and recommends AcuityAds Holdings Inc. The Motley Fool recommends EMERA INCORPORATED.


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