The right year-end investment can add tax efficiency and stability to portfolios

With its holistic approach to distributions, Equiton's Apartment Fund makes for a simpler, more predictable tax season

The right year-end investment can add tax efficiency and stability to portfolios

This article was produced in partnership with Equiton

As 2023 winds down, financial advisors are beginning year-end tax planning and examining portfolios to strategize for the upcoming year. Tax-loss selling, a strategy where investors sell investments at a loss to offset capital gains, is top of mind for many after a period defined by interest-rate hikes and high inflation.

But while many advisors are familiar with using this strategy to minimize their clients’ overall tax burden, the next challenge lies in ensuring tax-loss proceeds are reinvested efficiently to serve them well in the future, says Geoff Lang, Senior Vice President, Business Development at Equiton.

“Given the volatility we’ve seen in the past year, we see investors showing an appetite for more stability in their portfolios,” says Lang. “Stable growth, stable taxes. They don’t want surprises.”

Monthly distributions and holistic wealth planning

Some popular investments, like mutual funds, will regularly distribute income from interest, dividends, and capital gains at fixed intervals throughout the year. These distributions can be received as cash or invested back into a fund and are considered taxable income.

However, some funds may also choose to pay out a special year-end distribution, often in mid-December when investors have already set their expectations. “These year-end distributions and their tax implications can catch some newer investors off guard,” says Lang.

By contrast, investments that pay return on capital (ROC) distributions while avoiding taxable distributions can greatly simplify tax season, especially for advisors of high-net-worth clients, says Lang. That is because ROC distributions, which represent distributions in excess of a fund’s earnings, are not taxable in the year they are received.

One way Equiton’s Apartment Fund sets itself apart is that it pays out 100% ROC distributions and does not pay out a taxable special distribution at year-end, says Lang. This strategy aligns with holistic wealth planning. “Taxation is a major consideration in how our Fund is structured, and we aim to be a resource for advisors seeking tax-efficient investment solutions,” he says. “It means fewer unwanted surprises.”

Recent achievements and future plans

Looking to the new year, Equiton’s Apartment Fund is poised to add value and stability to client portfolios. Throughout 2023, the Fund continued its strong performance and added significant growth potential with the acquisition of Scenic Towers, a multi-residential rental property in London, Ont. This acquisition, along with the private equity firm surpassing $1 billion in assets under management, marked exciting milestones.

With this latest acquisition, the Fund's portfolio now includes 33 properties spanning two provinces, totaling 2,674 units. Lang states that despite this growth, their due diligence process remains steadfast, continuing to target consistent returns.

 “The Apartment Fund targets a net return of 8 to 12% after fees. Currently, our Class F has achieved a 10.46% increase year to date (as of October 31, 2023), placing us squarely within our targeted range. This reflects another successful year, and we're pleased to help reduce investment portfolio volatility for many Canadians,” he said.

“We're committed to continually enhancing value for our investors and will persist in acting in their best interests.”

Enduring the test of time

The potential for growth in private Canadian apartments remains significant. The ongoing supply-demand imbalance, characterized by insufficient supply and high demand for rental units in Canada, is one of the tailwinds fuelling the resiliency of the asset class. Given the current focus on interest rates, Equiton’s approach to acquiring new properties includes assessing existing mortgages and their terms.

“Often, we can assume these mortgages, avoiding resets at substantially higher rates. Fortunately, our Fund's average mortgage rate is just over 3%, with an average term to maturity of just over seven years. Most of our mortgages won't mature until 2029 and 2030,” says Lang.

“Heading into 2024, we're in a strong position for risk mitigation, with no mortgages due next year. This stability positions us as a valuable addition to an advisor's portfolio for the right clients.”

For advisors, it's increasingly critical to consider a variety of asset classes beyond just equities and fixed income. Private Canadian apartments within the real-estate sector have demonstrated strong growth over the past 38 years, underlining their importance and potential in a diversified investment strategy.