Invest in RRSPs, stocks, but cut easy costs

An easy way to increase your cash flow is to pay off high-interest debts first.

Q Recently, I inherited several thousand dollars. My wife thinks we should put it all in Registered Retirement Savings Plans. I think we would get a better return in the stock market or buy a tri-plex. Which form of investment is more guaranteed? What expenses are deductible?

— JOHN, TORONTO

A There is no greater guarantee on investments. The only so-called risk-free investment would be a Guaranteed Investment Certificates (GICs), and this is because the rate of return is very low. Investments can be risky.

The type of investment you purchase will depend on the level of risk you are willing to take. A recent TD report, entitled “U.S. slow-down underway, Canada in for a bumpy ride,” has many investors waiting on the sidelines, both for stocks and real estate.

Much of this has to do with increased energy cost, a slowing U.S. economy, higher interest rates and a cooling of the housing market.

Pay high-interest debts, such as your credit card balances and mortgages, first. Not fantastically creative but it’s effective with no risk. Next, consider your wife’s recommendation to buy RRSPs: These contributions are deductible, defer income taxes on the returns and you can also invest in the stock market if you so choose.

Generally, investments that generate tax preferential treatment such as Canadian dividends, should be kept outside your RRSP and investments that pay, for example, interest which attract higher income taxes should be kept sheltered in your RRSP.

Costs relating to purchasing, selling or maintaining a stock or real-estate portfolio are important factors to consider when assessing the aftertax return of an investment:

• Interest: Interest paid on borrowed money for the purpose of earning income such as stocks that pay dividends, real estate for investment purposes, bonds, etc., may be deducted for tax purposes. However, interest borrowed for buying RRSPs or a principal home do not qualify for the same tax treatment and is not tax deductible.

• Stock-broker commissions: Charged to buy and/or sell stocks. Not deductible. They’re incurred when buying shares form part of the (adjusted) cost of the shares, while the commissions when selling reduces the proceeds you receive. They will effectively reduce capital gains.

• Real-estate investment fees: Costs such as real-estate broker commissions, and legal fees for buying or selling real estate, are not deductible. However, similar to stock broker commissions, they will reduce capital gains.

• Mutual load fees: Load fees are treated in the same manner as commissions and they must be added to and from part of your cost of the fund.

• Investment advice: Fees paid for professional advice are deductible providing they are paid to a professional investment manager. A case of beer given to your neighbour for a hot tip is not deductible.

• Accounting and tax preparation: Reasonable accounting and tax preparation fees may be deductible. Read up, and consult an adviser.

Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Questions to Money Matters should be e-mailed to choochonghcga@yahoo.ca.