Tax smart Investing

With Tax smart investing the goal is to maximize your after-Tax-return on investment. That means more money in your pocket and less going to the government.

Getting the after-Tax rate of return you want involves two parts; getting the investment that achieves your target return and paying the correct form of tax.

Tax in Canada comes in three types: interest income, dividend, and capital gains.

Interest Income is what you always pay at your highest Marginal Tax Rate-Your MTR. Any withdrawals from a Registered account-RRSP are Taxed as interest income.

Non registered savings accounts are subject to interest income Tax, which is paid whether you have accessed the cash or not. that’s what those T3 and T5 forms are all about when you receive them from the bank at Tax time

Dividend income has the associated dividend Tax credit which reduces the level of tax you would pay at your full MTR. An eligible dividend receives a Tax credit of 18.9655%.

Here’s how that works. Let’s say you earned $1,000 in dividend income. At 40% marginal Tax rate - you owe $400 tax. CRA grosses the dividend amount by 1.45 which equals $1450. Then CRA subtracts 18.9655% from the grossed up amount which equals $275 Tax. Instead of $400.
This Tax credit is only available to non-registered money.

Capital Gains which are Taxed at 50% of the value of the growth at your full MTR. Capital gains Tax is only payable once you have crystallized your gain. Once you have sold the asset that has shown the gain

Example. You bought a painting 10 years ago for $7,000 and sold it at auction for $18,000 last week. You have earned an $11,000 capital gain.

Your Tax would be the gain of ($11,000) divided by 2 = $5,500 -- times your MTR (say it’s 40%) = $2,200 Tax payable. remember you don’t pay this Tax until you have sold the painting.

Your financial planner should target three things; Tax elimination with Insurance products, Tax reduction with equity products and Tax deferral with Registered products. If all you are doing is dumping cash into Balanced funds in your RRSP, and GICs for your non registered cash don’t be surprised at how poor the after Tax returns are, when you go to withdraw the money in retirement

A big part of Tax smart investing is not trying to do it yourself, hire a professional to do it for you.

It never ceases to amaze me what some reasonably intelligent people will do on their own.

Case Study

TAX TIP Put your fixed income investments inside your RRSP. Keep your dividend and capital gains investments in an open account. Way less Tax on the same money!

There are people who will jump into the market and go it on there own, thinking only of return. They are missing all the other really important aspects of financial planning.

When you are sick you see your Doctor for a diagnosis and a prescription. You don’t do it yourself. If you are being sued you hire a lawyer you don’t defend yourself.

There are people in the financial planning industry who eat, sleep, and breathe those boring Tax regulations, Insurance rules and complex investment products. Who have years of experience and are available and ready to help you.

When choosing an advisor to work with. Remember only a CFP can call themselves a CFP. Look for a CFP or a CLU another stand out designation.

**Starting January 2009 the Canadian government introduces the "NEW" Tax-Free-Savings Account Click here to find out more

Get Tax smart investing on your side today.

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Disclaimer

The illustrations show here are just that illustrations. How Tax smart investing would work for you has to be decided, between you and your financial planner. The illustration shown for the dividend tax credit was for eligible dividends non eligible dividends have at different formula.

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