Also, we Canadians need to rely on foreign equities to diversify our holdings, which brings us foreign income (foreign dividends) that are taxed at full marginal rates once our basic personal amount is used up ($11,474 CAD per person).
Any non-trivial* ideas to reduce our average tax rate further? Say, < 10%?
*Holding the securities indefinitely to delay the tax bill is considered a trivial answer, and not that useful. Same with eligible dividends, which messes with diversification.
Here's the thing: if you want to be under 10% year-after-year, with a nice income that you can live on and do some fun things with, you need to seriously reconsider your policy on dividends. I think it's a big mistake to dismiss them in service of 'diversity' in your portfolio. In BC, where I live, you can earn up to
$50,000 completely tax free each year, so long as it is all eligible dividends. Not all provinces are the same (anyone can check easily for your province by looking up the Simple Tax Calculator online).
The point of diversification is to reduce the risk of underperformance of a single security, industry, or country.
During the market collapse of '07-08, global 'diversity' in portfolio didn't give much protection. Everything fell, and in fact, that was a product of the very high degree of 'diversification' and investing out. The countries who didn't have huge housing bubbles were exposed anyway because of massive investment in financial instruments from countries who did. Diversification can offer some growth opportunities, but as far as protection goes, I think it's a non-starter.
When countries had more insular financial systems, diversification offered more real protection; now, all financial calamities are contagious.
Personally, I am building an investment portfolio of industry-diversified Cdn eligible dividends, with US non-eligible div stocks in my RRSP, and Canadian trust (these are the .UN stocks; they pay dividends, but they aren't eligible and the tax treatment is more complex) in my TFSA, along with more Cdn eligible div stocks.
Because of tax treaty rules with the US, US dividends are not withheld or taxed in an RRSP, which they are in a TFSA or regular investment account. This is why everyone, including very low income people, should use an RRSP. You will want some US stocks to be properly industry diversified, and it's the only way to hold them without having your dividends withheld at 30%.
Otherwise, your legal and honest options for tax reduction are quite limited, unless your income is very low to start with.
Other options that provide good tax breaks but investment risk include
private-placement flow throughs (the investor buys new issued shares from an exploration company that agrees to let the exploration tax break "flow-through" to the investor) or a venture capital fund like the Working Opportunity Fund (this was a BC-based fund with a good tax break, but the return was shit and I didn't do it twice).
With flow-through, you get a good tax break, but will pay capital gains on the shares later at the amount you invested, even if they drop in value. To do this, you need a broker, or you may be able to do it directly with the company. If you see a junior oil & gas or mining company you like, you can call their investor relations dept and say you're interested in future placements. They will have a minimum, and it will probably be at least 5K.
Many companies do PP without the flow-through, so be clear on which it is before you commit.
BTW, Creating your own unprofitable small business to write off 'losses' and reduce your taxes is a pretty bad idea. After 3 years of losses, Rev Can becomes very much more interested in your activities, because they are looking for people who are doing exactly that. It's quite a useful strategy if you're planning to operate a legitimate small business after retirement, on which you are earning some net income and paying some (reduced) taxes.
