Hate Taxes? Develop a Tax-Efficient Portfolio

Whether you invest in dividend payer Emera stock or high-growth AcuityAds stock, there are tax considerations. The remedy to lower tax payables on investment income or be tax-efficient is to own various types of investments in your portfolio.

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

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

Dividend income

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

However, the marginal rate tax rate for dividends is a percentage of actual dividends received, not grossed-up taxable amount. Canadians can defer paying taxes on dividend income by holding the stocks in a Registered Retirement Savings Plan (RRSP). Your income grows tax-deferred until you withdraw the funds.

For risk-averse investors

Emera (TSX: EMA), for example, is a perennial choice of dividend investors. At $59.19 per share, the $15.18 billion energy and services company pays a lucrative 4.31% dividend. All quarterly dividends are taxed every time. If you want to skirt taxes or pay zero taxes on dividends, hold the utility stock in your Tax-Free Savings Account (TFSA).

Utility stocks are defensive assets preferred by risk-averse investors. Emera has a solid history of growing dividends, too. Management has plans to increase dividends by 4-5% annually through 2022. The target is achievable, since the company derives revenue from rate-regulated utilities, and therefore, cash flows are predictable.

Emera’s portfolio of regulated utilities is the growth driver. With a $7.4 billion capital program in place, management expects its average rated base to grow by 2023. Emera’s U.S. business accounts for 60% of revenue, while the rest comes from the home country.

Capital gains

There are three basic types of investment income in Canada. Dividends are first, followed by capital gains and interest income. Long-term compounding interest investments include bonds, treasury bills, and GICs, and they aren’t tax-free. Tax experts recommend holding them in an RRSP or TFSA.

For non-dividend stocks, investors realize capital gains only after selling the stock or asset. However, your capital gains are subject to tax. Some investors prefer investing in growth stocks, because capital gains are taxed at a lower rate than interest and dividends.

AcuityAds Holding (TSX:AT)(NASDAQ:ATY) is fast emerging as one of TSX’s tech superstars. The growth stock had a terrific run in the last 12 months. At $9.19 per share, the trailing one-year price return is 164.08%. As of September 21, 2021, the shares are down 35.7% year to date.

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

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

Tax-efficient portfolio

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

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

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