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Tax-Efficient Investing

Taxes are inevitable, but you can minimize the amount you have to pay by strategically making tax-efficient investment decisions. It starts by understanding that the amount of tax you pay on non-registered investments can vary
according to the type of income or growth your investments generate.
How investment growth is taxed
Investment income can be divided into three main areas, each of which is treated differently by Canada Revenue Agency.
 

Interest and other income:   The highest rate of tax is paid on interest income, which is generated when an investor loans money to a person or an organization. Investment vehicles that generate interest income include GICs, bonds, mortgages and bank savings accounts.  

Dividend income:   Through dividend payments, a company can share its profitability with its shareholders, without the shareholders needing to sell shares. Dividend income is taxed at a lower rate than interest income.  

Capital gains income:   This form of income refers to the difference in the amount you pay for an asset and the price at which you sell it (assuming a positive return). Of the different types of income, capital gains income is taxed at the lowest rate.  

When your investment earns you $100,
here’s what you’ll have after tax
(assuming you’re in the highest tax bracket)
 
Source: Combined Top Marginal Tax Rates for Individuals in Ontario, 2018, and rounded to the nearest dollar.
 
Begin by Understanding Registered Vs. Non-Registered Accounts:  Maximize your registered savings accounts
 
Canada's federal and provincial governments have created savings programs that provide tax advantages and incentives for Canadian investors. The main ones are RRSPs, RRIFs and TFSAs, but there are also registered education savings plans (RESPs) and registered
disability savings plans (RDSPs). These accounts are referred to as "registered" accounts, and they allow you to either defer or avoid paying tax on your investment income or growth.

Registered accounts have various restrictions, such as how much money you can contribute and how long the account can stay open. Conversely, non-registered accounts have no contribution or time limits. Typically, the income generated in non-registered accounts is fully taxable in the year it is earned. That's why it makes sense to ensure non-registered accounts are as tax efficient as possible.

When investing in a registered account like a tax-free savings account (TFSA), you don’t have to be concerned about the nature of the income earned. That's because investment income is not taxed when earned inside any of these accounts.

However, once you've maximized your contributions to your registered plans, or if you want additional flexibility in accessing your money, you may wish to invest in a non-registered account.

Here are a couple of options to consider deferring and reducing the tax you pay on investments:
Corporate Class Investment Funds

A corporate class fund is designed as a holding corporation, set up by a fund company to invest in a group of mutual funds. The result is that corporate class funds tend to pay out distributions that are more tax efficient to the investor. Plus, as long as your money remains invested in a corporate class fund, the tax payable on any gains is deferred. This allows your money to grow faster and more efficiently through the power of compounding.

Learn more about Corporate Class Investment Funds.

 
T-Series Investment Funds

These funds are attractive to investors because they distribute return of capital (ROC). This form of distribution is not taxed until your investment capital is depleted. In other words, not until the adjusted cost base (ACB) reaches zero or the units are sold. In some T-series funds, the ROC distribution makes up all or most of the expected return, enabling you to maintain your original investment in the fund.

Learn more about T-Series Investment Funds.

 
Here's where we can help!
We prepare and review a comprehensive investment plan to help you reach your goals, we then help you decide on the best options for investing and building your portfolio.
Additional Information
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