Episode 164: Phased Selling: The Smarter Way to Shift Family Wealth | Canadian Investment Portfolios

Listen here on our website:

Or jump to this episode on your favourite platform:

Watch Now!

What if fixing your aging parent’s high-fee investment portfolio triggered a $200,000 tax bill here in Canada?

Many Canadians discover too late that cleaning up a poorly managed investment portfolio—especially one built over decades—can have huge unintended tax consequences. If you’re trying to help aging parents with their wealth, or maybe nurse your portfolio back to life, you may be torn between doing what’s “right” financially and avoiding costly tax mistakes. This episode unpacks a Canadian listener’s real-life situation and the tough lessons it reveals for anyone navigating inherited or family wealth.

You’ll learn:

• Why “ripping the band-aid off” isn’t always the smartest tax move—and what to consider before doing it.
• How phased selling and understanding tax brackets here in Canada can dramatically reduce capital gains liabilities.
• The key questions to ask before switching to low-fee ETFs or other “better” investments to ensure it’s actually worth it

Press play to learn how to protect more of your family’s wealth by making smarter, more tax-efficient investment moves.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.  

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Navigating parental investments and planning for your own future requires a deep understanding of smart investment strategies and tax efficiency. Whether you’re shifting from high-fee mutual funds to low-cost ETFs, or managing the impact of capital gains, effective financial planning is key to optimizing both short-term returns and long-term security. In the context of wealth management for families and business owners, tools like phased selling, personal financial buckets, and the investment bucket strategy can enhance investment performance while minimizing tax liabilities. For entrepreneurs, integrating financial systems for entrepreneurs, optimizing RRSP room, and leveraging Canadian retirement strategies such as the Smith Maneuver or RRSP tax savings offers a clear path to building long-term wealth in Canada. Strategic decisions like salary vs dividends in Canada, corporate structure optimization, and balancing personal vs corporate tax planning are essential for robust business owner retirement planning and modern wealth building strategies in Canada.

Transcript:

What would you do if you discovered your aging parent’s portfolio was full of underperforming mutual funds and high fees? Easy, right? Just sell them off and shove them into a better mix of low fee ETFs and be done with it. Well, unfortunately, it isn’t always that easy as this Canadian Wealth Secrets listener found out as he was later…

given a nice large tax bill that’s going to cost about $200,000 in capital gains taxes. Let’s dig into another Canadian wealth secret seeker case study around a good problem to have and a good problem worth solving, which is building up large gains on your investments over your lifetime and how you slowly decumulate them in the most tax efficient way.

Here we go. All right, so today my friends, we are gonna be diving in to a situation. We have a listener, Andrew. He lives out in BC. His father lives on the East Coast. He’s originally from the East Coast and his father had a large portfolio, over two and a half million dollars.

And this particular individual reached out because he wanted a little bit of feedback and really some strategy on what he should do next. Because what he recognized immediately was that these $2.5 million of assets were passively being managed by and really what I think he wanted was active management. However, they were being passively managed by a wealth management company.

name I’m not going to mention but some they let’s just put it this way they have their name on some big big buildings across Canada and even some sports arenas and and unfortunately for this particular individual is father who is older in their eighties really has just done a set and forget it sort of strategy now here’s some of the challenges that you know this.

particular individual, Andrew feels like the actual advisor wasn’t actually serving his father well or his family or his interests. However, we actually don’t really know what those conversations look like and sounded like, right? So we don’t understand if maybe, you know, this advisor had done some things in order to determine, you know, what’s his risk capacity? What’s his risk tolerance?

I would argue that his risk capacity is quite high. He has quite a few assets. He’s a very low spender, this individual. However, his risk tolerance could have been very low, right? So we don’t really know what had happened there. However, as I’ve done as well with my own family, my own parents, at times I’ve looked at what they have going on and sometimes questioned why their advisor that they had been with for many, many decades had done X, Y, or Z.

Today we’re gonna talk about not about whether the advisor did the right thing or not, but rather what he can do now, now that he’s sort of ripped the band-aids off, as well as we’re gonna give some guidance to those who may have not yet ripped a band-aid off to decide whether ripping a band-aid off is the right move or if there’s something else that we could do. So ultimately what had happened when Andrew had looked at these accounts is that he felt that

the advisor had put his father into some pretty poor investments, right? And again, for those who look at low fee ETFs, for example, it’s very easy for us to say, you know what, there’s a high MER, management fee on this mutual fund, and we could have done something better with an index ETF.

Now keeping in mind when we look at ETFs, usually that’s a little bit more self-managed. There are advisors, there are firms out there that will use just ETF strategies. Sometimes there’ll be a fee for service. Sometimes they will still take, you know, one, one and a half percent off of the total assets under management. So it’s really important for us to recognize that when we go to say a big bank, how the big bank is paid is by a larger MER fee.

and they use those fees to help pay some of their employees. get salaries and sometimes bonuses and so forth. However, on the other end, if you go to a firm that’s charging for assets under management, even if there is a low fee ETF in the portfolio, there’s still more to be taken because the firm itself is also going to be taking a fee off the top. This is something that every investor has to really think about along the continuum from

how passive or how active do I want to be in managing my portfolio? I think it’s important for everyone to have at least a baseline understanding of what’s happening in order for you to then decide what makes most sense. The same is true when someone gets into real estate. A lot of people get in and think, real estate, I’m gonna be great at it, I’m gonna love it, and I’m gonna invest, and therefore, I’m just not gonna pay for any property management. However, many people, like myself included,

recognize that you know what it’s hard work and with that work sometimes that stress isn’t worth it sometimes the time and energy isn’t worth it and therefore you’re happy to pay a fee to someone else to do that work for you property management can can be seven to ten percent of the net revenue coming in on a rental property so if you want to talk about high fees that’s a high fee but it’s very active work right and

not having that call on, on, you know, new year’s Eve that, you know, the, the water tank is leaking as it did to us a few years ago in one of our units, knowing that I don’t have to deal with that is worth that to me. The same is true when we’re looking at a portfolio in the stock market. So just want to make sure that everyone’s not just resorting to this low fees is always the right move. Low fees is always the right move. If

you are willing to take on the responsibility, the full responsibility of your portfolio. That would definitely make a ton of sense, right? So in this case, I don’t know what the exact fees were. I don’t know what the actual assets were that were were invested, what these mutual funds were designed to do. However, Andrew went in and said, you know what, we’re getting rid of all this stuff. And he sold it all now.

I’ve been there, I get it, you know, I want to rip the bandaid off and I want to sort of start fresh. Now, I should also mention that they were trying to also gift much of this portfolio to this individual to the son, because the father actually didn’t need these funds yet. And they were thinking of a way to try to make this transition a little easier. I think the thought was is that if and when well not if but when the father passes away.

This could happen anytime. We don’t know how long we’re going to be here for. It could be today. It could be 20 years from now. It could be even longer. Now, when that happens, we are ripping a bandaid off at that time, whether we like it or not, through a deemed disposition, right? So ultimately, at the end of the day, if we’re not doing something to transfer some or all of these assets over to Andrew, it will eventually happen, whether you like it or not.

So that is really important to note here. The one nuance that I want to mention, though, is that sometimes pulling that bandaid off all at once now may not be the best option, even if those assets were in some mutual funds that maybe weren’t a great fit. For example, you know, didn’t give me some numbers, but he did say that those mutual funds historically were underperforming the market. Now,

When we say the market, are we talking global market? Are we talking the TSX? Are we talking the S &P 500? Are we talking the Russell 2000? What are we talking about here? That was not mentioned. However, when we look at those mutual funds, depending on what they were designed to do, for example, if they were designed to be more resilient in market downturns, it would make sense that they’re going to underperform the market because you’re going to have more risk off assets included in that bucket.

So there’s a lot of moving parts here, but what I’d like to address on this episode is what we might have considered doing differently. Now, you know, it’s all after the fact. So these gains have been crystallized. Okay, they have been crystallized. There’s, you know, sort of no going back. However, you know, he wanted to know, like, was there something else he could have done to rip this bandaid off? So one thing that came up in the discussion was around the lifetime capital gains exemption.

for business owners. So these funds were inside a corporation because his father was a business owner along the way. Now that business has since ceased to operate actively. However, the corporation was left and it became a holding company or an investment company. So those funds were inside of that company and continuing to grow and accumulate. The problem is, is that that lifetime capital gains exemption is really only helpful

for small business owners that have active income. So it actually has to be an active operating business. It can’t be an investment portfolio. It even can’t be a real estate portfolio, right? Even though I would argue there’s a lot of active work that goes into real estate investing. It’s not gonna work for that. So we can’t apply the lifetime capital gains exemption. You you’ve mentioned things about rollovers, for example, like rollovers like a section 85 rollover, for example,

is usually something that we turn to when we’re trying to roll shares over for a specific reason. Now, one that comes to mind is for the lifetime capital gains exemption. Holding company might own the shares of the operating company, might have to do a rollover so that the actual business owner himself once again owns those shares so that that lifetime capital gains exemption can be utilized. So that’s not gonna work here. Also,

We’re stuck because we can’t actually just gift these assets over without triggering a capital gain. right, so gifting is, there’s no tax on gifting. However, in order for the gift to be made, the liquidation of those assets has to happen, right? If we transfer the assets in kind, meaning leave the assets invested in the mutual fund and then actually transfer them over, there’s still going to be.

a capital gain triggered at that time. So that’s not really going to be helpful. So really there was nothing better that could be done here if the ultimate decision was that we’re gonna rip this bandaid off, okay? However, what I wanna think about is some ideas that we might’ve considered instead of the rip the bandaid off mode, I would think that phase selling at minimum would have been a good move here. And each and every year, if we could,

do phased selling in order to take on less tax liability each year, that could be really helpful. So what I mean by this is when we sell a large amount of anything and there’s capital gains, we’re essentially going to be putting ourselves in the highest tax bracket in that given year, right? So even though we’re only gonna pay 50 % tax on the capital gain, sorry, let me say that again. Even though we’re only gonna pay tax on 50 %

of the capital gain, okay, very important to note, it’s not 50 % of the capital gain that is tax, we’re going to only apply tax to half of the game. So half of it’s tax free. That’s great. That’s fantastic. But the other half is going to be considered income. And therefore we’re going to have to pay tax on that. And that in the highest tax bracket is going to be at about depending on where you are, 25, 26, 27%, depending on the province that you’re in.

So still not horrible from the actual tax rate, even if you’re in the highest tax bracket. However, what if we could do phase selling and slowly sell some of these assets over time so that the capital gain that is triggered is less and we might even be in a lesser tax bracket. So for example, if, as he said, his father doesn’t spend a whole lot of money, if he doesn’t spend a whole lot of money,

maybe there’s an opportunity there for us to take less income from other aspects, right? So for example, he’s getting his old age, you know, his old age security, he’s getting his CPP, he’s getting all of those things automatically, but he doesn’t have to take any income from RSPs or rifts or, you know, any of these other registered buckets, right? So.

If we can do phase selling in order to have him live from some of this phase selling. So that covers his lifestyle and the remainder can then be reinvested into the asset that you were looking to reinvest into. We could do this slowly over time and potentially lower that 25, 26, 27 ish percent on the entire capital gain that we’re paying in this particular scenario, right? So over time we can do that, you know, and slowly phase out.

The other thing we can look at is being very specific about what we’re selling. So if we look at any sort of assets that are, you know, maybe have some sort of loss associated with them now with these mutual funds and assuming they’re the same mutual funds that he’s owned for many, many, years, maybe even decades, it’s unlikely that there’s any loss to be harvested there, but it’s worth noting for everyone else who’s listening.

that this could be something that you could take advantage of if you were ever stuck in some sort of situation like this. Now, the next part, and I think probably one of the most important parts is thinking about where these assets were held. So if it was two, I think in this case, it was two and a half million dollars of investments inside the corporation. again, there’s nothing you can really do about those two and a half million. But for anyone else who’s listening,

should be looking at the different buckets that you have. If you’ve noticed that all the buckets have assets that you don’t like and you wanna sell them all, keep in mind that in a registered account, this isn’t gonna be an issue for you as long as you’re not removing them from the registered account, right? If you are removing those funds from the registered account, specifically RSPs or Liras or RIFs or anything like that, there will be…

capital gains or I shouldn’t say capital gains, but income tax triggered at the personal level. If it’s in your tax free savings account, you can sell the assets, you can pull them out, you can put them back in within the next year, right? So just make sure you don’t over contribute, you can’t remove and then put it immediately back in. But you can get that room back in the following tax year. So with registered accounts, there’s a little bit of flexibility here. Once again,

not super helpful for Andrew and his father in this particular case. Now here is the final piece and probably the most important piece that I think has to be considered before we do any sort of rip the bandaid off approach, regardless of whether it’s in a corporation or in an unregistered account at a personal level, whether it’s real estate, it doesn’t matter if there’s going to potentially be capital gains. We need to really ask ourselves this question.

and it might sound simple, but is the move worth it? So what I mean by that is what is the upside of the new investment? We need to quantify this. We need to get our head wrapped around. When we look and see high fees and we see maybe a lack of performance in the market, you need to quantify that so that you can actually analyze how much is this going to save me over?

however many years over one year, two years, 10 years, 20 years, what is the timeline that we’re looking at? So is that new investment and getting all of those funds in there today, is that enough to justify the six figure tax bill that we’ve just triggered? So for example, if we are just moving from mutual funds that were, and I’m gonna assume these are balanced mutual funds. So there’s a little bit of everything in there. And the goal here is to try to limit downside risk.

There’s a very specific purpose for selecting that type of asset. Now, if you’re moving it all into the queues, right? So the NASDAQ where Amazon, Google, Apple, know, micro strategy and all of these other big tech firms are, of course, the returns on that market or that particular index is going to be higher typically over time. However, the drawdowns are going to be much larger as well in down years. So the question is,

what is the upside going to look like? And the last piece that I wanna share on that is that we can actually quantify this by just running some very quick numbers. Now we do need to know a few things. So what I’m gonna do as well, if you’re on YouTube with me is I’m actually gonna share the screen here. So that should be coming up for those who are on YouTube in just a second. But ultimately what we’re gonna do is we are going to look at a quick spreadsheet here. This spreadsheet is the ugliest spreadsheet you’re ever gonna see.

but it’s a really important one and it doesn’t have to be fancy in order to run some quick numbers and try to figure out whether ripping the whole bandaid off now is really worth it. So in this particular case, we started with about two and a half million dollars. And if let’s assume that, that, you know, the mutual funds on average were earning say 7 % per year, I don’t know what that number is, but here’s the nuance. It doesn’t actually matter what that number is. Okay. You can put in whatever number applies to your situation.

What you need to see is what’s the arbitrage? Like what’s gonna be the difference when I put these dollars into another asset, right? And how long is it gonna take? So what I’ve done is I’ve shown at 7 % a year, and again, we can adjust this. We could change that to 5 % or whatever percent, it doesn’t matter. And then what I have here is going up by 1 % increments to show the difference on the lesser amount. So that two and a half million,

turned into about $2,270,000 just south of it after paying the capital gains tax that was applied for ripping the bandaid off. So if I apply an 8 % growth rate on that, that’s a 1 % difference, right? So if it was all about MER fees, for example, and it was only like, let’s say 1%, you’ll see here that the new…

the new investment with lesser dollars, it’s going to take about 11 years before you supersede what the current investments we’re doing. in this case, if that was the difference, if it was a 1 % arbitrage, the question is, is it worth doing that and then waiting 11 years to see a positive result on ripping that bandaid off? And I would argue the answer is probably not.

right? could I could slowly inch my way into this new investment, especially if it’s in the market, and it’s just ETFs, for example. Now, if it’s a building and a lifetime opportunity in real estate, or there’s some big opportunity, then 100%, you’re probably looking at higher growth rates and a larger arbitrage between what you were earning and what you could be earning in this new investment. Once again, probably higher risk, though. But if you’re willing to take on that risk, that might make sense to rip

bandaid off. So what you’re going to see here is that as we inch up from 8 % to 9 % to 10 % all the way along, you’re going to see that the timeline to break even actually moves up quite significantly. So when we go up to 9%, that’s a 2 % increase from what this person has been investing in so far. Now you’re going to beat you’re going to start beating the current portfolio after five years, it’ll be in year six.

When we go up by 3%, it’ll be in year four when you start beating. When we go up 4%, it goes to year three. Now right here, you might be like, okay, so if there’s like a four, five, six, 7 % arbitrage, which again is probably kind of hard to do in a lot of cases. But if so, you’re like, okay, now the runway is not that bad, but you’ll notice that the runway sort of stagnates a little bit. So.

a 4 % arbitrage that means 11 % per year, you know, it takes you into year three, a 5 % arbitrage, so 12 % instead of 7 % is still in year three, when we get to 13%, which is a 6 % arbitrage, it’s year three, year two, when we start to grow. And that stays stagnated from 13 % all the way to 17%. So like a 10 % differential.

and it’s still going to take you into year two before you’re going to start superseding what the current portfolio was doing. Now, above that, we move into year one, right? And things start to really start escalating. So the real question is, is how long of a runway will it take before doing this action is actually going to start putting me in a positive arbitrage situation from the actual asset that we’ve sold and its value today.

And I would argue in this particular case, it probably, and again, it’s only an assumption, but I’m going to assume that a slow drain on some of these assets and a slow shift into new assets probably makes more sense so that you could keep more of that capital gain from triggering and spread it out over more years. It might still take you six years before you’re fully in.

right? Or maybe even 10 years before you’re fully into this new quote unquote ETF or assets or whatever it might be. But by saving and saving more tax dollars, or at least deferring more tax dollars in the meantime, you’ll be able to continue growing a larger amount of money at a lower rate as you’re slowly scaling into this new investment. So friends, if you’ve

been in a situation like this or you have a situation like this coming up, feel free to reach out to us over at the Canadian wealth secrets website. We so appreciate people dropping us these great questions. Sometimes they come in through email. Sometimes they come in through a discovery call. You’d like to see what your next best step is along your journey. Head on over to Canadian wealth secrets.com forward slash pathways, and you’ll be able to figure out which

phase of the four phases in your wealth building journey you are in currently and some next steps to keep you moving in that direction. you’re ready to hop on a discovery call because you’ve got specific questions or next steps that you’d like to work with us on head on over to the discovery page at canadianwealthsecrets.com forward slash discovery and book yourself a discovery call. Of course we love ratings and reviews we so appreciate everyone who takes the time to hit

whatever rating button they think is appropriate on their podcast platform. And of course, leaving us a comment and subscribing on YouTube is super helpful. All right, just a quick reminder, my friends, that this is not investment advice. It is not tax, legal, accounting, financial or investment advice, and that you should only be taking this information for educational and informational purposes only. And as a reminder,

I am Kyle Pierce and I am licensed as a life licensed accident and sickness insurance agent and I am currently the VP of corporate wealth management over at the pan Corp team, which includes corporate advisors and pan financial.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

OPTIMIZE YOUR FINANCIAL FUTURE