Coping with Taxing Times

It is that time of the year when investors who have supplementary taxes to pay are scratching their heads. Taxes are due on all the gains on investments revealed to Revenue Agency via T5 by your broker. While gloating all the year about the money she was making for you, she never pointed out the tax implications. In some respect you have a right to curse the advisor who made money for you without as much as getting up from her easy chair and who leaves the most serious problem to you: Where to find the money?

It is a problem and if you have a substantial portfolio it can be huge. For young investors with smaller portfolios which need to grow, it may not be serious; they were considering addition to the portfolio anyway. For investors near retirement with substantial portfolios and therefore substantial gains in a good year, the tax can approach their employment income. Whether small or large, the problem is symptomatic of confusion among investors at a basic level; viewing gross income as real income. Individuals who plan on spending gross income from their employment receive a shock when they find that the net income after innumerable deductions is only a fraction of gross income. Similarly, investors who look at gross gains, capital or dividends, without considering taxes receive their shock at this time of the year.

The source of the problem is with the investment manager. She usually charges a percentage of the gain in a portfolio. General rate is called two twenty; two percent of the portfolio value and twenty percent of the gains. Manager does not deduct taxes and pay them to Revenue Agency on your behalf. If she did, it will save so much heartburn later. But it will also reduce the gain by the income she now makes for you on the deductions themselves.

There is a simple solution to the problem you are facing right now. Consider Revenue Agency as your not so invisible good time partner who is happy to share in your gains while leaving the burden of losses on you. In a profitable period, I hope you have many, set aside partner’s share as the gains are realized i.e. stocks are sold at a profit or the dividend and interest income is received. If you wish to add to your investment account from your savings, consider this a separate item. Thus there two elements to an investment account: Tax liability and addition to (or withdrawal from) it. They should be treated as different, not be mixed up as they often are.

The best way to handle the situation is to request the investment advisor to inform you of capital gains and other income at regular intervals, monthly or quarterly, and for you to set the invisible partner’s share aside – either in the investment account as ready cash or in the savings account to be withdrawn when taxes are due. To carry on your affairs without due consideration for this aspect of your investments can be expensive if you have to sell some of your investments in a hurry or borrow money on margin, even worse on your credit card directly or indirectly.