As an investor, it is important to consider the taxation efficiency of an investment. Unlike types of investments are taxed differently by the Canada Revenue Agency (CRA). The tax treatment of an investment can affect your return over the long-term. Belongings investments in a tax-sheltered account similar your Registered Retirement Savings Plan or Tax-Free Savings Account minimizes tax; interest income held in a non-registered business relationship is taxed at your marginal tax rate, making it the least tax efficient.

Registered Retirement Savings Plans (RRSPs)

A lot of investors make the fault of thinking an RRSP is a type of investment like a stock or bail. An RRSP is an account that holds different types of investments, such every bit stocks, bonds, mutual funds and savings accounts. When y'all contribute to your RRSP, you receive a revenue enhancement refund because yous are receiving a refund of the income tax already been deducted from your pay check.

Practise non brand the mistake of bold y'all do not have to pay income revenue enhancement; with an RRSP, you defer paying income tax merely you take to pay it somewhen when you withdraw money in retirement. Until so, your investments grow tax-free.

Tax-Free Savings Account (TFSA)

Introduced in 2009, the TFSA is similar to the RRSP, only you practice not receive a tax refund from contributions. Similar to your RRSP, your investments grow revenue enhancement-costless inside of the account. Since you contribute with after-tax dollars, you practice non take to pay income revenue enhancement when yous eventually withdraw your money.

A TFSA is a lot more than flexible than an RRSP. When you withdraw coin, your contribution room is not lost; you tin can contribute the amount withdrawn the following yr. For case, if yous withdraw $5,000 from your TFSA in March 2016, you can contribute the same $v,000 back on January. one, 2017, or afterwards.

Capital Gains

When you agree stock or mutual funds in a not-registered account, you only have to pay tax when you sell your investments.

  • If you sell your investment at a profit, you must claim a capital proceeds.
  • If y'all sell your investment at a loss, y'all claim a capital loss.

For example, if you bought a stock from XYZ company for $200 and sold it for $400, you pay capital gains on the difference of $200. With capital letter gains, merely fifty percent of your profit is taxable. On capital gains of $200, you only pay income on $100 at your marginal tax charge per unit.

Involvement Income

Interest income is the least tax efficient type of investment income.

Examples of interest income include savings accounts, terms deposits and bonds. Y'all are fully taxed on any interest earned. Even if you roll over your interest, you must include it equally taxable income. For that reason, consider holding interest income in a tax-sheltered account like your RRSP or TFSA to maximize your tax savings.

Resources:

  • RRSPs and related plans
  • The Revenue enhancement-Gratuitous Savings Business relationship