Congratulations on your successful retirement! At a time when most people are focused on decumulation, ask for an approach to long-term, tax-efficient investments in your business. Let’s go over these important considerations:
Investment decisions: robo-advisor or DIY – and ETFs or bank stocks?
A robo-advisor is a good choice for automated, tax-efficient, and inexpensive investments. A robo advisor can offer you a portfolio of inexpensive, broadly diversified ETFs. Regular rebalancing, quarterly reporting, and ease of use make this option attractive if you’re looking for a hands-on approach. Most of the leading robo-advisor platforms in Canada will help you set up a corporate account.
If you like something more practical, consider implementing a multi-ETF model portfolio. This approach requires you to open an account with a broker and make some regular investments, including cash allocation, dividends reinvested, and Rebalancing.
Alternatively, you can also consider implementing an asset allocation ETF solution. These “all-in-one” ETFs are available in a variety of equity / bond allocations to suit your risk preferences and are globally diversified.
You mention that you care about tax efficiency. Broad index-based ETFs map an underlying market index. The stocks and bonds in these indexes don’t change often, so there won’t be a lot of buying and selling of stocks – also known as “sales” – occurring within your ETFs. A low-turnover portfolio is not going to generate many unwanted capital gains for you in years when you do not want to withdraw money from your accounts. All in all, tax efficiency is a huge benefit of an index fund ETF approach to investing, especially if you are investing within a company.
As an alternative, you also mentioned bank stocks. I can understand the appeal of this approach as buying shares in major Canadian financial institutions has proven to be an effective strategy over the past several years. Unfortunately, the past performance of an investment strategy does not tell us much about its future performance. And in the case of bank stocks, your investment will be very focused in a single sector in a single country. This investment approach harbors risks that can easily be diversified away through the use of broadly diversified, index-based ETFs. (In fact, Nobel Prize winner Harry Markowitz famously called diversification “the only free lunch when you invest.”)
Understand the pros and cons of business investments
Investing within a company can be complicated. A corporation is taxed differently in Canada than an individual. As natural persons, we are taxed according to a progressive income tax system, which means that higher amounts of income are taxed at higher rates. In your case, if you earn (or realize) a lower income in retirement, your most recent income is likely to be taxed at a lower rate than when you were employed. When you combine lower tax rates with other benefits the senior tax system offers – such as pension splits and retirement credits – it is possible that you will not be taxed at the high end of the marginal tax table in retirement.
Passive investment income generated within a corporation, on the other hand, is taxed in Ontario at a flat flat rate of around 50%, or close to the highest marginal tax rate. The passive income tax rates are so high because the Canada Revenue Agency (CRA) doesn’t want us to have an unfair tax break by investing our portfolios in companies.