How Efficient is Your Portfolio?
When it comes to choosing investments, it makes sense to pay attention to your investment objectives, time horizon and risk tolerance. It may also be important to compare the way different investments are taxed.
Although investments within a retirement savings plan (RSP) enjoy tax-deferred growth, investments held outside of a tax-deferred plan have different rates of taxation. And having a tax-efficient portfolio may save you thousands of dollars in the long-term.
Tax on Interest
Tax on interest is calculated at your full marginal tax rate, which varies depending on your income and province. In some cases, you can expect to pay up to 50 percent tax on interest income if you are in the highest tax bracket.
Tax on Dividends
Dividends from Canadian public companies received by individual investors are “grossed up” by 25 percent to represent the full value of the income the company is presumed to have made before tax. To reduce double taxation, a federal dividend tax credit is applied equal to 13.33 percent of the enhanced figure reported on the individual's tax return, plus an additional provincial dividend tax credit. Effective 2006, the gross up is proposed to increase to 45 percent and federal dividend tax credit to 18.9 percent with most provinces adjusting their provincial dividend tax credits as well.
Tax on Capital Gains
Capital gains are taxed at marginal tax rates, however only 50 percent of capital gains are considered taxable income. Furthermore, they only need to be reported when they are realized. Mutual fund investments may pay a capital gain distribution (typically annually), which also needs to be reported on tax returns. With the help of your advisor, you can also realize capital losses, which can then be used to help offset capital gains but not other sources of income.
Tax on Return-of-Capital (ROC)
A relatively new trend in distributions, ROC differs from other distributions because the payout is comprised of return of capital from the original investment. Payments of ROC are not taxable, however they do lower the adjusted-cost-base of the units of the investment to which they relate. This could result in a capital gain when the investment is sold. The realized capital gain would then be taxed at the preferential capital gains rate. Conversely, a capital loss could be experienced.
Speak to Your Selectpath Advisor
Tax efficiency is only one aspect of successful investing. Speak to your Selectpath Financial Advisor today to see if a tax-efficient strategy is right for you.
The statements contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or complete. The article is not intended to provide financial, legal, tax or investment advice. For information purposes only. Particular investment or trading strategies should be evaluated relative to each individual's objectives. TD Asset Management Inc., The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. TD Mutual Funds is a trade-mark of The Toronto-Dominion Bank, used under license.
