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Not all investment income is taxed equally.
Canada’s taxation system is highly complex and ever-changing. However, there are strategies that can help minimize the amount of taxes investors will pay, allowing them to get the most out of their savings and investments.
If you hold investments outside of a registered plan, it’s important to keep in mind that all income earned by these investments is subject to tax. However, not all investment income is taxed equally.
Incorporating tax-effective strategies when choosing your investments may help individuals to reduce or defer the amount of tax incurred.
Personal tax-savings strategies
Tax-sheltered investments – Canadians pay tax on what they earn while their money is in open accounts, while tax-sheltered investments uphold the general idea that the money individuals put towards investing will potentially accumulate tax-free, withdrawals are fully taxed as income like RRSPs, RESPs, RRIFs and permanent insurance will be regarded as taxable income and will be subject to tax in the calendar year receive it. While TFSA is the only option which allow you to keep what you earn while your money is in the plan and no taxes when you take it out.
Tax-loss selling – Tax-loss selling is the practice of selling investments that are in an accrued loss position in order to offset capital gains realized either in the current year or in the previous three years. When redeem investments, the difference between the adjusted cost base (ACB) and net proceeds receive is normally considered a capital gain or loss. Only 50% of the capital gain or loss is included in calculating your income.
Income splitting – For individuals who are in a high tax bracket, it might be beneficial to have some investment income taxed in the hands of family members (such as a spouse, common-law partner or children) who are in a lower tax bracket. To avoid attribution, individuals can lend funds to family members, provided the rate of interest on the loan is at least equal to the government’s “prescribed rate,” which is 1% until March 31, 2017.
Tax-efficient investment solutions
When it comes to investing money, there are many options available to satisfy investors need based on their own unique personal and financial situation. The best option is likely a combination of products that balance risk with the potential for growth, there are several available solutions to maximize tax-efficient investing including:
