Companion Advisor: Taxes
A dollar is not a dollar
This is the time of the year when all sorts of
tax slips are arriving in the mail, and the filing deadline of April 30th
begins to weigh on us. I sometimes get anxious phone calls from clients
who want to file their income tax returns as soon as possible.
From a tax preparation perspective, we concentrate on
the tax slips that clients provide for their return that is to be filed.
From a tax planning perspective , I advise clients to consider their current
tax situation at the beginning of each yearand its never too
late to start planning now.
In the eyes of the Canada Customs & Revenue Agency,
a dollar is not a dollar.
Each dollar is not taxed the same way. In my book, Planning
Your Financial Future, I suggested that if you review and change
the types of income you receive, you may be able to reduce your taxes.
For instance, if you are paid on commission rather than
salary, there are expenses that you can deduct for tax purposes that a
person who earns salary income cannot. This includes expenses for your
automobile such as gasoline, repairs, maintain, insurance, parking, car
payments, and a portion of the cost of your car in the form of depreciation.
So if you can negotiate your remuneration to be partly commission based,
you can save taxes.
Another tax planning recommendation, that may be of
special interest to retired persons and others who have investments, is
that you should consider receiving dividend
income rather than interest income.
Investments such as government or corporate bonds,
Guaranteed Investment Certificates , Canada
Savings Bonds pay interest income on a regular basis. These kinds
of investments are often favored by retirees because they receive a regular
income to replace the salary they used to have. These investments are
often safe and suitable for investors who are risk averse.
The safety feature provides peace of mind but with safety,
there usually is a price. The price you pay includes a lower yield
or return on your investment, AND, a higher amount of tax.
Investments in preferred
shares or common
shares of companies that pay a regular dividend may be a better alternative.
Amongst those dividend-paying companies, some are less volatile and safer
than others. Dividends are taxed at a lower rate than interest income,
so that your after-tax yield may be higher than the after-tax
yield of your bonds and GICs. After-tax yield
is the amount of interest or dividend you keep after paying the tax man.
If you are retired and have sufficient income to live
on, you may not need any dividend or interest income from your investments.
In this case, you may wish to review and change your portfolio and save
taxes each year. By choosing investments that do not pay dividend, you
do not have to pay tax until you sell your investments AND on only 50%
of your capital
Lets look at the after-tax yield of
interest, dividends and capital gains for someone with taxable income
of $40,000 living in Ontario. If you earn $1,000, you will keep, after
paying tax, $844 if this is capital gains, $842 if this is dividends and
only $689 if this is interest income.
As you can see, a dollar is not a dollar,
and you should be mindful of the what your investment earns on a after-tax
This applies to investments in mutual fund investments
If you invest in mutual funds, you should review the
tax slips you receive for . The tax slips, which could be either T-5s
or T-3s, will indicate whether this fund has made distributions in the
form of interest, dividend income or capital gains. You have to include
these amounts on your income tax return and pay tax on the distributions.
You can be proactive by reviewing the prospectus of the mutual fund. In
look for the Investment
Objectives of the fund to see what kind of investments the fund will
be making. Do these investments pay dividend or interest , or is the fund
investing in growth companies which often do not pay dividends and you
may realize a capital gain.
If you are considering the purchase of new mutual
funds, be sure to review the Investment Objectives and Income tax
considerations to ensure that this is the most efficient investment for
Most of my clients are too busy to monitor their investments
all the time. When they file their income tax return, I take this opportunity
to review their taxes and investments mix with them, you should consider
doing the same with your accountant or financial
Anne Chun is a Toronto Chartered Account and Certified Financial Planner. She advises individuals on Financial, Tax Planning and is the author of Planning your Financial Future.
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