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Taxes and Your Investments

The only real number that matters in investing is what you make after the Canada Revenue Agency takes its share. This is known as your after-tax rate of return. A fixed-income investment paying 7% sounds good, but consider your after-tax return. If you were in the top income-tax bracket of around 50 per cent, you would take home only about 3.5%, which is quite a difference (assuming the investment is outside of your RRSP).

What is more, the amount of tax you pay varies with the type of investment and how you arrange your portfolio. These factors can have a great impact on your after-tax return. (Note that you don't have to pay any tax on gains earned by money in a tax-sheltered account such as an RRSP or a RRIF until you make a withdrawal.)

The most heavily taxed types of investments are those such as GICs and CSBs that earn you interest income. Stocks, real estate and other investments that entail more risk but have the potential for higher returns in the form of capital gains are taxed less. Dividends from Canadian corporations have the lowest effective tax rate.

After-tax return of $1,000.00 investment



Description Interest Dividends
Capital Gains
Taxable Amount $1,000.00 $1,380.00 $500.00
Basic Tax (41%) $410.00 $565.80 $205.00
Dividend Tax Credit N/A ($207.00) N/A
Net Tax $410.00 $358.00 $205.00
Net After-Tax Income $590.00 $642.00 $795.00
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Tax Changes
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