Investing with Taxes in Mind
There are different kinds of investment income—and different tax rules for each. It's worthwhile to consider the kind of income you'll earn when you devise your investment strategy outside a registered plan.
Investment income breaks down into three basic categories:
Dividends
Dividends are basically a payout of a company's profits to its shareholders. "Dividends paid by Canadian companies are eligible for the Dividend Tax Credit and attract less tax than other types of investments," advises Heather Clarke, C.A., Director of Advanced Financial Planning Support at Investors Group.
With mutual funds, Canadian dividends earned by the fund are distributed to the fund's unit holders and they enjoy the same tax advantages as dividends paid directly to the company's shareholders.
Capital Gains
Anytime you sell a capital asset whose price has increased from its purchase price, you generate a capital gain. Capital assets include things such as stocks, real estate and mutual funds.
"If you own equity mutual funds, you may find that they generate capital gains every year, even if you don't sell your units" says Clarke. "Activity within the fund may require that a capital gains distribution be made."
Regardless of how you earn it, a capital gain receives tax-favoured treatment, as only fifty per cent of the net annual gain are added to your income and taxed.
Interest
Interest income is simply added to your income and taxed at your marginal tax rate. Within your mutual fund portfolio, your fixed-income funds are most likely to pay interest.
"Because there are no tax breaks on interest income, you may want to minimize the interest-earning investments you have outside your tax-sheltered registered plan," advises Clarke.
Your investment decisions should be based on your risk tolerance and financial goals, not income tax goals alone. But you can make sure you take the tax treatment of your investments into consideration and take advantage of that knowledge, for example, by holding interest-earning investments inside your registered plan.
For more information on tax-smart investing, contact your Investors Group Consultant.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
