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The Vault
Taxing matters Inside an RSP, your investment earnings grow tax-free. Outside of an RSP or other governmentalregistered plan, the tax treatment of your savings depends on the type of investment income that is generated. Interest income Bank accounts (including high-interest accounts), GICs, bonds, and bind funds all may generate interest income. This type of income is fully taxable, just like your employment income. Your bank statements, investment account statements, and mutual fund statements will record any interest you've earned during the year. Dividends Dividends from your Canadian stocks or divided mutual funds qualify for the federal Dividends Tax Credit, which substantially reduces the tax you pay. Your investment company will send you a form detailing any dividends received. Capital gains (and losses) If you sold or transferred stocks, bonds, mutual funds, real estate, or other capital assets during the year, you may have a capital gain (or loss) to report. You may also have capital gains earned by mutual funds and passed through to you as a unit holder. Only one-half of your capital gain is taxable. So if you realized a capital gain of $2000 on the sale of a stock, only $1000 will be taxable to you. On the other hand, capital losses can be used to reduce taxable capital gains. Your mutual fund company will provide you with a tax slip showing the net capital gains passed through to you for the 2006 taxation year. However, your brokerage or fund company will not send you tax slips detailing the gains or losses you realized by selling or transferring your investments (although many will send you a record of what you bought or sold). It's up to you to report capital gains (and any losses used to offset these) on your return. Portfolio tip: Although tax considerations are important, the quality of the investment, and its place in your overall portfolio, should always be your first consideration. Get your investments working together When your investments are working together effectively, they may attract loses tax - which means more money in your pocket. Here are a few strategies that can help. Allocate spending Do your own investments inside and outside your RSP? If so, it can be advantageous, from a tax perspective, to hold fully taxable interest earning assets - such as bonds and GICs - in your RSP, where they can compound tax free. Investments that generate Canadian dividends and capital gains can be held outside your RSP, where you can take advantage of their more preferential tax treatment. Diversification tip: A diversified portfolio of investments can help reduce risk, but diversification doesn't mean having more accounts. For instance, if you hold a number of mutual funds at different institutions, it can be difficult to spot areas of duplication - the funds may overlap and hold similar investments, which can actually make you less diversified. Time your capital gains Capital gains are taxable only when they are realized. In other words, you can choose whether to sell or transfer a capital asset. If you take a capital gain when you are in a low tax year, you'll pay less tax on it. By taking a long-term, buy-and-hold approach, you can defer the realization of capital gains for many years. You might also want to intentionally trigger a capital loss, in order to offset capital gains recognized in the same year. Your tax advisor can help you decide if this strategy is right for you. The proceeding information was provided by Graham Barber, Branch Manager of Scotiabank, Alcona Branch. The Scotiabank, Alcona Branch, is located at 1161 Innisfil Beach Road, (705) 431- 6116. The Vault is a weekly series of articles provided by Graham Barber with financial advice and suggestions. |
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