At 63, Anthony is retired and living comfortably in southwestern Ontario with his wife Liz, whom he married in 2009, and his 31 year old daughter, who has Down syndrome.
His late wife was an American citizen, so when she died, her social security payments went to Anthony.
When Anthony's father died a couple of years ago and left him an estate valued at $485,000, he wasn't quite sure what to do with the money. Like many Canadians, he had little experience investing. He and his wife have only modest registered retirement savings plans - about $20,000 each.
"I should be happy to receive this windfall, correct?" he writes in an e-mail. But his new-found wealth has led him to fret about the income tax he and Liz pay on their investments. She has a $300,000 portfolio of her own.
When he first got the bequest, Anthony took the money to his local credit union branch and invested it in GICs, income-producing mutual funds and dividend funds. Liz's money is invested with a full-service investment dealer, so she has a fairly well-balanced portfolio that is a tad heavy on income trusts.
"How can we invest in a tax-efficient way?" Anthony asks. Naturally, they also want the highest possible returns.
We asked Allan Small, senior investment adviser at Dundee Securities Corp. and director of the firm's private client group, to look at Anthony and Liz's situation.
What the Expert Says
Both Anthony and Liz are invested mainly for income, Mr. Small notes. Yet they say they don't need to draw on their investments to complement their monthly pensions. Altogether, the family's gross income is about $73,000 a year, including Anthony's daughter's disability pension.
So the first step would be for Anthony and Liz to draw up some investment goals: What do they want to do with the money?
Next, they have to honestly assess their risk tolerance, Mr. Small says. The financial adviser at the credit union likely made investment recommendations based on the couple's input.
If Anthony opens a brokerage account, he can draw from a much wider array of investment options. Instead of parking $100,000 in a three-year GIC paying 3.9 per cent, he could buy some corporate bonds, which have higher yields than GICs, or some quality bank preferred shares for the low-risk portion of his portfolio, Mr. Small says.
With GICs, "after subtracting inflation and taxes (GIC interest is fully taxable as income), Anthony will barely make any money." Dividend income from preferred shares, by comparison, is lower because of the dividend tax credit.
Together, Anthony and Liz have investments of roughly $760,000, Mr. Small notes, so they do not have to limit themselves to mutual funds, with the possible exception of a global fund for international diversification. Instead, they can invest in securities directly.
He suggests either professional money management or a fee-based account with an investment dealer where the clients make the final investment decisions. Anthony's funds are fairly high cost, Mr. Small notes. Their management expense ratios range from 1.55 per cent 2.6 per cent. These fees are not tax deductible.
With a fee-based account, fees would typically range from 1 per cent to 2 per cent - an amount that would be deductible for tax purposes. With fee-based accounts, Anthony and Liz would have "portfolios that are specifically designed for them," he says, "in essence, their own tailored mutual fund based on their risk level and objectives."
Mr. Small recommends diversified portfolios comprising stocks, real estate income trusts, good quality preferred shares, corporate bonds and international funds for exposure to Asia and other emerging markets, regions of the world that are growing more rapidly than North America at the moment.
How much of each asset class will depend on their individual risk tolerance.
His suggested portfolio would be heavy on dividend payers and companies that return capital. As well, it would hold growth stocks of companies that are leaders in their sector, pay good dividends and are trading at a discount to their underlying value. Sectors he favours are financials, oils, commodities and infrastructure - all areas that tend to outperform as an economy is coming out of recession.
"I don't believe the double-dip scenario."
Anthony and Liz may also want to consider how they will provide for his daughter once they are no longer alive.
"If they can follow these general rules, Anthony and Liz will make money and will not have a huge tax bill at the end of the year," Mr. Small says.
The people
Anthony, 63, Liz, 59, and Anthony's 31-year-old daughter.
The problem
How to invest Anthony's new-found wealth in a tax-efficient manner.
The plan
Shift gradually from GICs and high-fee mutual funds to corporate bonds, high quality preferred shares and dividend paying blue chip stocks.
The payoff
A diversified portfolio, the potential for growth and a smaller tax bill.
Monthly net income
$4,800
Assets
Bank accounts $20,000; GICs $100,000; mutual funds $600,000; RRSPs $40,000; house $200,000. Total: $960,000.
Monthly disbursements
Food and eating out $200; clothing $100; drugs, dental $150; vacation $150; mortgage $600; property taxes $235; house insurance $100; utilities $150; telecom, cable $160; maintenance $20; furniture $100; entertainment $110; auto, transportation $520; credit card payments $200; life insurance $100; donations $500. Total: $3,395.
Liabilities
Credit cards $1,200; auto loan $5,000; mortgage $16,000 (prepayment penalty). Total: $22,200.