Tax Topics with Fin
Fin MacDonald, Fin Tax Service
Disclaimer: I am not licensed to sell any investment products. I approach this discussion from my twenty plus years helping people with their taxes. Any investment decisions that readers may take should be done with either professional assistance, or, based on your own study and competence, with the understanding of the potential risks involved. IF IT SOUNDS TOO GOOD TO BE TRUE – DON’T BE A SUCKER!!
Different Investments – Different Tax Treatments
As I have previously written, much of tax policy is (allegedly) designed to reward behaviour that the government of the day thought should be rewarded. Up until the early 1990s there was a deduction for Interest Earned (on Guaranteed Investment Certificates (GICs), bonds or savings accounts. It was up to $1,000 of interest that was tax free to encourage people to save. Why it was eliminated, I have no idea. Currently, interest is the most taxed of all investment income, taxed at the taxpayer’s marginal tax rate.
Capital Gains are taxed on only half of the gain. Dividends have special tax treatment, depending on whether they are Eligible or Ineligible (sometimes referred to as Ordinary Dividends).
Differences in Taxation of Different Investment Income
In the table above, the single taxpayer, under 65, has no other income.
Looking at the table, one can see the huge differences in the tax treatment of various kinds of investment income. For example, one can have $51,635 in Eligible Dividends and pay no income tax. On a purely tax basis, Eligible Dividends are the best for reducing taxes payable. BUT, there are other factors at play. First, the required holdings to generate the $51,635 in income would be, at for example a 4% dividend rate, would be $1,290,875. That stock would also trade on a Canadian Stock Exchange and be subject to market fluctuations.
Second, the Dividend “Gross-Up” as it is called – the amount between the Actual Dividend and the Taxable Dividend – will affect eligibility for some tax credits and income tested non-tax benefits. A senior begins to lose their Age Amount at $36,430 based on their Net Income. Net Income is also used for things such as Medical Services Plan Premium Assistance, Shelter Aid For Elderly Resident, and other means-tested programs.
A local Credit Union, earlier this year, offered a 4% 33-month GIC. If you had the required $1,290,875 to achieve the $51,635 in income, you would have paid tax of $15,335.30, vs. $0 for the Eligible Dividend holder. It is not often, in today’s low cost of money environment, that a 4% Guaranteed rate is available.
The cost of buying, selling and managing investments are grouped together under the heading of Carrying Charges. Examples are: money borrowed to make investments; professional fees paid to manage investments (including investment advice and accounting fees), and commissions paid on purchase/sale of investments. Unfortunately, Safety Deposit Box fees are no longer deductible. Some fees are hidden in the investment, for example the Management Expense Ratio (MER) in Mutual Funds.
Fees paid for management of Registered Accounts, such as Tax Free Savings Accounts (TFSA), Registered Retirement Savings Plans (RRSP) and Retirement Investment Funds (RIF) are NOT deductible from a taxpayer’s income. Last year the CRA sent up a trial balloon to suggest that fees for Registered Plans, that were paid outside the plans, would be subject to a 100% penalty. The thinking behind this is that paying the fees outside is analogous to having a higher contribution limit. There are penalties in place if you over-contribute to an RRSP or TFSA. An announcement from the CRA is expected this fall; it will not impact 2018 Tax Returns.
If you sell an investment for less than you paid for it, you may have a Capital Loss. (If you sell, and then re-purchase an investment within 30 days, you have a Superficial Loss, which is deemed not to have occurred.) A Net Capital Loss (50% of your Capital Loss) will be applied against Net Capital Gains that occur in the same year. If you have a loss, but no gains, you have two options: (1) Carry the loss forward, and use it when you wish, or, (2) Carry it back up to three years to apply to previous years gains. Watch for more about Loss Carry Backs and Loss Carry Forwards in the October issue of The Beacon.
So, Dear Readers, this was an Introduction to Tax Planning and Investments. In the October issue, through my lens of Helping You To Keep More of YOUR Money, some year end tax planning advice will be offered.