Up Investment Management of Aligned Capital Partners

Our Investment Approach

Our investment approach is to first work with you to understand your personal goals, risk tolerance, risk appetite and unique individual situation. From there, we determine the best possible investment allocation that will help you to achieve those goals while carefully managing how you are exposed to risk. By focusing first on what you’re trying to achieve we can help you to avoid emotional decision making and instead focus on your disciplined, long-term success.

Diversification

Diversification is ensuring that your portfolio is not overexposed to any one particular risk. It’s easy to point to stories of individual assets that exploded in value; much harder to replicate such explosive growth year after year. The most successful investors are those who are properly diversified – managing their risk and still being exposed to the opportunities that will help them outperform over time. We focus on diversification between sectors, industries, geographics and asset classes. It’s not a one-time process either – diversification should be adjusted as worldwide economies shift; a portfolio should be a living, breathing thing that changes with the times.

Tax Efficient Investing

When it comes to asset allocation and portfolio construction, tax matters. Tax and inflation are the two largest hindrances on the growth of your portfolio. Understanding how Interest Income, Dividends, Foreign Dividends and Capital Gains are taxed will affect how your portfolio is constructed. Foreign dividends don’t qualify for the dividend tax credit, and within a Tax Free Savings Account foreign investments are subject to withholding tax. Corporate accounts are subject to the highest tax rates in Canada but get to take advantage of the Capital Dividend Account and Return of Dividend Tax on Hand. Trusts offer opportunities for splitting income due to their flow-through nature. All of these structures play into how you should build out your asset allocation. Rather than looking at each account (RRSP, TFSA, CORP, NON-REG etc) individually, each should be used to maximize the tax efficiency of your portfolio as a whole.

Passive vs Active

We’re agnostic about the benefits of active vs. passive investments – it’s our job to do research and select the best tool to do the job we’re seeking to do. When there is no active alternative that can match a passive asset (Index Fund or ETF), we use the passive option. When there is an active manager who regularly exceeds the performance of the passive option, particularly when adjusting for important metrics like down-side or risk, we’ll use the active option. Both are tools in a toolbox – it’s far too limiting to assume that one is always the best when each has its own pros and cons.

Independence

When you go to a bank, they’ll sell you products the bank owns, not the best options on the market. If you’re tired of just being another number and being sold generic portfolios please reach out and we can show you how much better off you could be.

Corporately Held Investments

The tax rate on business income earned by a corporation is generally much lower than the top personal marginal tax rate for an individual who earns business income. Until income is withdrawn from a corporation as a dividend, there is a “tax deferral” in the form of personal taxes that are deferred until a dividend is paid.

On the first $500,000 in taxable income in a given year a lower corporate tax rate applies (this is referred to as the small business deduction). The tax deferral on this income ranges from 35.5% to 41% in 2018. For active business income above the small business deduction the 2018 tax deferral ranges from 20.4% to 20.7%. The amount of tax deferred in the corporation results in higher starting capital for investments, compared to an individual investor. So, if the higher amount of after-tax business income is invested inside the corporation, a shareholder may end up with more after-tax income from the corporation (compared to investing personally) at the end of the investment period.

As of 2019, the small business deduction was reduced for Canadian Controlled Private Corporations with over $50,000 of certain investment income — “adjusted aggregate investment income or passive investment income” — in the previous year. The small business deduction will be reduced by $5 for each $1 of passive income that exceeds $50,000 and will reach zero once $150,000 of passive investment income is earned in the previous year. For purposes of calculating the passive investment income threshold, investment income of ALL associated corporations is combined. Private corporations with no active income such as holding companies will not be impacted.

What Now?

1. Corporate Investments should utilize a “buy and hold” strategy to defer capital gains if a corporation is approaching the $50,000 threshold.

2. Focus on Capital Gains versus dividend or interest income. In terms of asset allocation within different investment accounts, it is more efficient to hold capital gains bearing investments within your corporation due to the higher tax rate. Corporate Class Funds additionally allow for the use of investment management fees to offset gains. They are also designed to increase capital gains versus dividend and interest income which is less tax advantageous. These funds were specifically designed for funds in non-registered and corporate accounts.

3. Consider whether an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA) may be a more efficient place to grow your assets over the long run. Considerations should be made whether or not you plan to keep the corporation open for the long term, the total value of assets in retained earnings and what other investment and retirement assets you hold.

4. Corporately owned exempt life insurance may be appropriate as income earned within these plans is tax sheltered. For assets intended to be passed on to heirs in an estate insurance can also be a very effective place to hold assets in terms of crediting the Capital Dividend Account and paying out benefits tax free.