From: canada.revenue.agency@hotmail.com   
      
   How Does Canada Tax My Investments? : CRA SOTW   
      
   By Tea Nicola,  Co-Founder and Chief Executive Officer of WealthBar   
   Posted: 09/25/2015 5:12 pm EDT Updated: 09/25/2015 5:59 pm EDT    
      
   Albert Einstein once said, "The hardest thing in the world to understand is   
   income taxes."   
   When a man who is believed to be one of the smartest people of the 20th   
   century has an issue with the way income is taxed, you can rest assured that   
   it is not a simple subject.   
      
   Taxpayers are expected to understand it well enough to be able to make good   
   decisions about our own financial situation. But if understanding basic income   
   tax isn't enough of a headache, the taxes on investment earnings (such as in   
   your RRSP) represent a    
   whole new territory.   
      
   Below are some steps to help understand each of the different types of   
   investment income, how it is taxed and, as a result, why it matters what type   
   of account you use for different types of investments.   
      
   How is investment income taxed?   
      
   The simple answer is that, for the most part, investment income is taxed   
   exactly the same way as other earned income. What makes things hard to   
   calculate is the amount of the investment growth that is taxed, because not   
   all of the growth is actually    
   taxed all the time.    
      
   Overall, there are three types of investment income that we can consider and   
   they are each taxed in a different manner.   
      
   Interest Income   
      
   Fixed income vehicles, such as bonds, GICs and term deposits pay you interest   
   on your investment, thereby generating interest income. Interest income is   
   taxed just like any other earned income. So, if you deposit $100 into a GIC at   
   five per cent interest,   
    in one year, you will have to declare 100 per cent of that $5 you earned in   
   interest on your income tax return. Also, bear in mind that interest income is   
   taxed every year regardless of whether it has been withdrawn. At a marginal   
   tax rate of 35 per    
   cent, the tax on $5 in interest is $1.75.   
      
   Finally, you can consider each dollar of interest to be taxed at your marginal   
   income rate, since it is additional income earned to you regular income. In   
   this respect, interest income is the least favourable type of investment   
   income.   
      
   Capital Gains   
      
   Equity investments (typically stocks) can appreciate in value. This is called   
   a "capital gain." If you invest money in a company at a price per share of $10   
   and, over time, those shares appreciate to $15, you now have $5 per share of   
   capital gains.    
   However, you will only need to pay the capital gains tax when you sell the   
   share and realize the gain. What makes capital gains different than other   
   earned income is that only 50 per cent of the total capital gains are taxed.   
   So, when your share    
   appreciates by $5 and you sell it, you only have to declare $2.5 as income and   
   pay income tax on it. At a 35 per cent marginal tax rate, the tax is $0.88.   
      
   As a result, capital gains often represent the lowest income tax burden of the   
   three types of investment income, and they are typically preferred because we   
   have some control over when we sell and trigger the capital gains tax. Whether   
   or not they are    
   most efficient depends on your province of residence.   
      
   It is also important to note that even if you do not withdraw the money from   
   your account to spend it, capital gains can be triggered when you change   
   investments within your taxable account. If the new investments are   
   substantially different than the    
   original investments, or the same old investment is repurchased more than 31   
   days later, this will trigger capital gains.   
      
   Dividends   
      
   Dividends are a way for a corporation to share its profitability and success   
   with its shareholders, without shareholders having to sell shares. Dividends   
   are the most complex type of investment income when it comes to taxation.   
      
   Taxation of dividends in Canada has two major parts that make it different   
   from other taxation: gross up amount and dividend tax credit amount.   
      
   When a dividend amount is determined, the amount is grossed up by some   
   percentage -- usually 38 per cent. Next, the income tax is calculated on the   
   grossed-up amount and, finally, the dividend tax credit is subtracted from   
   that. The result is the final    
   tax payable on the dividends. Confused yet?   
      
   Here is an example with numbers (rates will vary by province):   
      
   Dividend is $5   
   Grossed-up dividend is $6.90   
   Tax, at marginal tax rate of 35 per cent, is $2.42   
   Tax credit will be 20.73 per cent federally and 13.8 per cent in most   
   provinces, applied to actual dividend amount is $1.73   
   Difference or tax payable is $2.42 - $1.73 = $0.69 (or roughly 13.8 per cent)   
      
   Dividends may have the lowest dollar value of taxes, but the tax is payable   
   when dividends are paid out and for most equity investments -- that is, on a   
   regular basis -- making the tax on dividends an ongoing burden.   
      
   But not all dividends are taxed the same way. The above method applies to   
   eligible dividends.   
      
   Eligible dividends are dividends declared by the issuing corporation, and are   
   as such eligible for enhanced dividend tax credit.   
      
   They are usually from:   
      
   - Public corporations resident in Canada   
   - Other corporations resident in Canada that are not Canadian Controlled   
   Private Corporations and are subject to the general corporate tax rate.   
   - Canadian Controlled Private Corporations that are resident in Canada and   
   their income is subject to the general corporate tax rate.   
      
   In other words, most investments that pay dividends will be eligible and have   
   enhanced dividend tax rate.   
      
   Non-eligible dividends are paid out by companies that are eligible for a small   
   business tax rate, are tightly held and use dividends to share profit between   
   its operating shareholders and shareholders eligible for return of capital.   
   They normally do not    
   apply for retail investments.   
      
   Summary   
      
   On $5 of investment income and 35 per cent marginal tax rate, you will pay the   
   following:   
      
   - $1.75 on interest, on an ongoing basis, even if you do not withdraw the funds   
   - $0.88 on capital gains, only payable when the asset is sold and the gain is   
   realized   
   - $0.69 on dividends, payable in the year the dividend pays out, usually   
   monthly or quarterly   
      
   Location of Assets   
      
   In order to optimize our investments for taxes, we have to be extra careful as   
   to where to keep certain types of investments.   
      
   Tax deferred accounts such as RRSPs and tax sheltered accounts such as TFSAs   
   are best used for the least favourably taxed investment income, such as   
   interest income.   
      
      
   [continued in next message]   
      
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