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ReturnInterest income, dividends, and capital gains. These are three quite cheerful financial concepts, but they deserve a closer look if only to better profit from them.
With tax season ahead, let’s refresh our memory on the fiscal impact of the various types of investment income.
Interest Income
Fiscally speaking, interest income is the least attractive because it’s fully taxable at your marginal tax rate.
Taking the 2020 rates, an employee earning $50,000 per year will see his interest income taxed at 37.12%. Someone declaring $100,000 will have to give back about half of the money earned in interest (45.71%, up to a maximum of 53.31%), hence why highly taxed investors with registered and non-registered portfolios are advised to concentrate interest income on the registered side.
Dividends
When you receive dividends from a Canadian corporation, the amount has already been taxed at the corporate level, so the tax system offers compensation to the investor in the form of a dividend tax credit. Note that tax calculations differ whether the dividend is classified as eligible or not.
For detailed information on the conditions, check out this section of the Revenu Québec website.
Capital Gains
A capital gain occurs when the price at which you sold a title, such as a share, a house, or a work of art, is higher than its purchase price. This is then subtracted from the cost of the transaction. Obviously, in the opposite situation, we talk about a capital loss.
Only half of the capital gain is taxed at the investor’s marginal rate. On a capital gain of $2,000, from which there are no operating expenses to subtract, $1,000 will be taxable.
If the investor in question is a Quebec employee earning $70,000 per year, he will have to pay $371 in tax for this capital gain.
Tableau comparatif
Jane, David and Alan all have the same salary of $70,000. On the other hand, Gaetan made a capital gain of 5000$, David received 5000$ in eligible dividends and Alain earned 5000$ in interest income.
Here’s what it looks like for 2020:
| Jane Capitale | David Danze | Alan Terust | |
|---|---|---|---|
| Salary | 70,000 | 70,000 | 70,000 |
| Investment Income | 5,000 | 5,000 | 5,000 |
| Income | 75,000 | 75,000 | 75,000 |
| Taxable Income | 72,500 | 75,000 | 75,000 |
| Federal tax | 7,692 | 7,794 | 8,334 |
| Provincial tax | 9,424 | 9,746 | 10,174 |
| RRQ and/or EI | 3,631 | 3,631 | 3,631 |
| Net Income | 54,253 | 53,829 | 52,861 |
The difference is not huge, but these estimates give an idea of the importance of maximizing income through tax-efficient financial planning.
Corporate Class Funds: a very interesting solution to save money
Remember that interest income is taxed at the top, while only half of capital gain is taxed at the marginal rate.
Corporate class funds are different from the usual investment funds you buy from the bank. Anyone should survey their financial advisor to find out if it might be worthwhile to take a closer look at this, but self-employed individuals and entrepreneurs often have a greater incentive to do so.
Roughly speaking, these funds turn interest income into capital gain. So instead of paying on taxes on the full amount, investors can potentially get a 50% fiscal discount.
Looking to reduce your tax bill? Contact one of our advisors to find the solution for you!!
