06/04/2014 12:17 EDT | Updated 08/04/2014 05:59 EDT

Be Tax-Savvy With Your Investment Dollars


Congratulations, you made it.

You survived the debt temptations of the holiday season, achieved your personal best in RSP contributions and only had to pay a small amount in additional taxes for the last year. Now you can relax until the whole headache starts again in a few months. But what if you could avoid the hassle by setting up a plan that could help reduce your next end-of-year tax bill? According to John Gallagher, an investment adviser from Desjardins Securities, it's about how you pay yourself first.

For example, when it comes to your registered accounts like an RRSP or a TFSA, your main goal is growth and/or to protect your investment. Plus, these are tax deferred or tax-free instruments so there is no immediate concern about the tax implications. "It's a question of how you choose to invest your money outside of your registered accounts," said Gallagher. "Making money is easy. Keeping it can be the tricky part. And that's why it matters how you invest." To illustrate his point, here are three general tax treatment examples for an individual with an annual income of $85,000 and earning $1,000 of investment income in three different types of investments (using 2014 rates and figures):

Earned interest

If you earned $1,000 in interest income from a bond or GIC, you have received the most tax inefficient income. At tax filing time, this full amount would be taxed at your marginal tax rate. The taxes on your interest will be calculated like this: $1,000 x your 39.41 per cent marginal income tax rate= $394.10, which would leave you with only $605.90 in interest.


Dividend income receives favourable tax treatment. The reason for this is because it represents after-tax corporate profits which are distributed to shareholders. If you earned $1,000 in corporate dividends, the tax payable is 1,000 x 19.86 per cent special dividend income tax rate = $198.60. Therefore you would be left with $801.40 in dividends, an extra $195.50 in your pocket compared to interest income.

Capital gains

Most people are familiar with the concept of buy low, sell high. The goal of selling high is to make a profit -- or a capital gain. For instance, if you bought some stock or real estate and made a $1,000 profit, your capital gain would be $1,000. Our tax system only requires you to pay tax on half of the gain. So, your $1,000 gain becomes $500 for tax reporting purposes: $500 x 39.41 per cent marginal tax rate = $197.05. Therefore your $1,000 gain leaves you with $802.95 after tax, an extra $197.05 compared to interest income.

Canada is a wealthy country with high income tax rates, but many of us pay thousands in additional tax each year because we haven't structured our investments with tax-efficiency in mind. "Many investors find our tax system very complicated, but a few simple tax-wise steps can keep more money in your pocket," suggests Gallagher. While these are very general examples, it's always important to sit down with an investment advisor to discuss what's best for you. His or her expert advice can help you identify your financial goals and risk tolerance before you start investing. Remember, creating a solid plan can be your most valuable tax-efficient tip.


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