Deciding where to put your investment dollars can be a complicated task. It depends on a number of factors, including your goals, your age and the risk you want to assume. While many look for the highest rate of return they think they can get, there are a couple of other factors to consider.
Chasing just high yield carry risks — as witnessed by the number of investment bubbles that have burst over the past few years.
Another consideration is that investments are taxed differently, and you should know some have more favourable tax treatment than others.
Understanding the different tax treatments is important when considering investments outside a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). (Investments in an RRSP are tax-sheltered until withdrawn, while all income earned within and withdrawals from a TFSA are generally tax-free.)
There are three main kinds of investment income:
1. Interest income
This comes from investments such as high-interest savings accounts or guaranteed investment certificates. Of the three kinds of investment income listed here, interest earned is taxed at the highest rate. Let’s say your total income is $69,000, that puts you in the 29.65% tax bracket. If you earn $10,000 in interest income, you’ll end up keeping $7,035 of it after paying income taxes.
2. Dividend income
Dividends are basically profits you receive from your stocks or shares of ownership in a company, or through an equity mutual fund. As a Canadian taxpayer you can claim a dividend tax credit that will lower the amount of tax paid on eligible dividends from Canadian companies. Canadian dividends are taxed at a lower rate than interest income.
So, again, let’s say you fall into the 29.65% tax bracket, and you earned $10,000 in dividend income (eligible dividends are taxed at a marginal rate of 7.56%). You would end up keeping $9,244 of that after taxes.
3. Capital gains (or losses)
This is the difference between what you originally paid for an asset, and what you sold it for. It doesn't apply to your primary residence but can apply to a second home such as a cottage, or to an investment property. As an example, someone in the 29.65% tax bracket who earned $10,000 in capital gains would get to keep $8,518 of that, once all the taxes were paid.
