Tax Smart InvestingTax smart investing is a simple goal of maximizing your after-Tax-return on an investment. That means more money in your pocket and less going to the government. Achieving the after-Tax return you want involves two parts:
There are three types of Tax:
Interest Income is what you always pay at your highest Marginal Tax Rate-Your MTR. All holdings within an Registered Account RRSP are taxed as interest income upon withdrawal. Non registered savings accounts are subject to interest income Tax, which is paid as you go along regarless of whether you have withdrawn the cash or not.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 amount of tax you pay. An eligible dividend (dividends from publicly traded Canadian companies) private companies are covered as well but the rules are different-speak with tax professional before making any decisons receives a Tax credit of 18.9655%. Note this rate is subject to change at the whim of the Government -- so always consult a tax specialist about this Example: Then CRA subtracts 18.9655% from the grossed up amount which equals $275 Tax. Instead of $400. $1,000 X 1.45 = $1,450 minus 18.9655% = $275 (Tax payable). It is possible to earn $45,000 per year in dividend income without paying any Tax, but you would need a million dollars invested Sidebar This Tax credit is only available to non-registered money. Capital Gains If you got to pay tax this is the one to pay!
Example. You bought a painting 10 years ago for $7,000 and sold it at auction today for $18,000. Your capital gain is $11,000. YTax payable $11,000 divided by 2 = $5,500 -- times your MTR (say 40%) = $2,200. remember you don’t pay this Tax until you have sold the painting. Your financial planner should target three things:
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 Financial Planners who eat, sleep, and breathe:
**As of January 2009 the Canadian government introduced the Tax-Free-Savings Account (TFSA)
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Return from Tax Smart Investing to Investing Terry Johnston J C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232 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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