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Investment Income

Investments come in many forms. T-bills, mortgage funds, mutual funds, guaranteed investment certificates (GICs), shares, and real estate are all typical sources of investment income. Many of us may be risk-averse and therefore choose to invest in low-risk investments, such as GICs. Experienced investors will most likely hold a diverse portfolio of investments containing low-, medium-, and high-risk investments. The most common types of investment income are interest, capital gains, and dividends. Each is taxed differently, and familiarity with the tax treatment for each can be useful for planning purposes.

Interest Income

Interest income attracts the highest level of tax. GICs, Canada Savings Bonds, and cash in the bank are typical examples of investments that earn interest income.

Capital Gains

Capital gains attract less tax than interest income because only one half of capital gains are taxable. Capital gains are triggered when a capital property is sold for proceeds greater than the original cost of the property. For example, if you purchased shares for $10,000 and sold them for $12,000, you would have a capital gain of $2,000. Only $1,000 ($2,000 x 50%) would be included in your taxable income.

Dividends

Dividends also attract less tax. This is due to the fact that dividends are paid out of a corporation's after-tax income. Because the corporation has already paid tax on the income, the investor receives a tax credit to compensate for the tax already paid. The dividend tax credit benefits lower income taxpayers more than higher income taxpayers.

There is a possibility that you can choose to include dividends received by your spouse in your own income for tax purposes and reduce your family's overall tax bill by doing so. This can only be done if the spousal amount claimed on your return is increased as a result of claiming the dividends.

Carrying Charges and Interest Expenses

You should ensure that you are taking advantage of allowable tax deductions for expenses related to your investments. Fees paid for the management or safe custody of investments are allowable deductions. So is a safety deposit box fee, if the box is used for the storage of investment securities. Accounting fees are also eligible if they relate to preparing and maintaining investment records. Investment counsel fees are also deductible. However, the cost of investment periodicals, investment newspapers, and RRSP administration fees are not eligible carrying charges.

Interest charges on funds borrowed to produce investment income may be eligible for a deduction as well. This includes interest paid to your employer for Canada Savings Bonds bought through payroll deduction plans and interest borrowed to purchase stocks, bonds, and other securities. You cannot claim the interest charged on loans to purchase an RRSP or RESP.