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Tax Tips for Investors

Understanding Your Options

Knowing how tax rules affect your investments is essential to maximize your after-tax return. Keeping up to date on changes to the tax rules is also important because they may open up new opportunities that
could affect the way financial affairs are structured for Canadian-resident individuals.

Reduce Tax With Income Splitting

Under our tax system, the more you earn, the more you pay in income taxes on incremental dollars earned. With this in mind, it makes sense to spread income among family members who are taxed at lower marginal rates in order to lower your family’s overall tax burden, subject to the income attribution rules. Some of the more common income-splitting strategies you may want to discuss with your tax advisor include:
  • An interest-bearing loan at the prescribed interest rates to family members in a lower tax bracket. This strategy is particularly attractive because rates are currently at historically low levels.

  • Pension income splitting between spouses (or common law partners).

  • Gifts to adult children or other adult family members.

  • Gifts to a minor child – directly or through a trust structure – to acquire investments that generate only capital gains.

Make Your Portfolio Tax Efficient

In evaluating investments for your portfolio, you should consider the impact of income taxes, since not all investment income is taxed in the same manner. Despite the wide range of investments available, there
are three basic types of investment income: interest, capital gains and dividends. Interest income is fully taxed at your marginal tax rate whereas you only pay tax on 50 per cent of a capital gain. Canadian
dividends also receive special tax treatment through federal and provincial dividend gross-up and tax credit mechanisms. A new dividend tax regime exists for dividends paid by a Canadian corporation to a Canadian individual investor after 2005 which results in lower effective tax rates for these "eligible” dividends.

Maximize Your Tax Deferred Savings With an RRSP or TFSA

Your RRSP is likely one of the most important elements in your overall retirement strategy. Allowable contributions to your RRSP are tax deductible and the income earned in an RRSP is not taxed until it is withdrawn, which means that your savings will grow faster than they would if held outside an RRSP. Some ideas to optimize use of your RRSP include maximizing your annual contribution limit, taking advantage of the extended deadline for collapsing an RRSP until age 71 and contributing to a spousal RRSP if you and your spouse/partner will have disproportionate retirement income levels.