When making your investment decisions, it is wise to consider the various tax implications – both positive and negative. As always, first remember that your investments should reflect your goals and values, your time frame and your risk tolerance. As we emphasize in the Build Your Own Financial Plan program: “Tax advantages can change with the government, investment decisions should only change with your life”.

That said, here are some important guidelines on how investments are taxed for you to keep in mind:

• Registered Investments (RSPs & Pensions) – These are not taxed until you remove money from your registered investment. You will then be taxed at the rate applicable on your income at withdrawal, which is usually at a lower rate at retirement than when you were working.  You also get a tax deduction when you contribute to a registered investment.
  

• Tax-Free Savings Account (TFSA): There is no tax on income earned from non-registered mutual funds or investments held in a TFSA, but you don’t get a tax deduction when you make a contribution to this type of account.

• Non-Registered Investments – Interest:  Interest on non-registered investments is fully taxable at your applicable tax rate. If you have money in non-registered investments, it is important to note that safer investments tend to be taxed more heavily.

• Non-Registered Investments – Dividends:  Dividend income from non- registered investments in Canadian companies qualifies for the dividend tax credit. This is an incentive for Canadians to invest in Canadian companies.

• Non-Registered Investments – Capital Gains: Capital gains are taxable on non-registered investments at your applicable tax rate — but only for 50% of your realized capital gains. Investments, such as stocks, bonds and certain types of mutual funds typically realize capital gains (or capital losses) in the year you sell. If your stock value goes up but you don’t sell, the gain is not realized, and therefore not taxed.
  

• Note: If you hold mutual funds (even if you don’t sell them) you might get a T3 slip reporting a capital gain. This is because the fund manager has sold investments within the fund that has a realized capital gain. When you sell your mutual fund, you will need to have records of the “adjusted cost base” of your fund to report your capital gain or loss on your tax return.  You can get this information from your mutual fund company or advisor.
• For more information on mutual funds see the Canada Revenue Agency’s publication RC4169 Tax treatment of mutual funds for investors.
  While learning about tax stuff may not be exciting, it’s important to understand the fundamentals of what you’re investing in and what you can expect to really earn from your investments – after fees and after taxes.  I’ll be speaking with Dayna Holland, CA about tax on investments in our upcoming MoneyMastery Ask the Expert teleclass.

If you have the basics of your financial plan covered, but are finding that you’re not as on top of your money and investments as you should be, email or call me at 604 880-4143 to talk about how the MoneyMastery program can help.

Karin Mizgala is a Vancouver-based fee-for-service financial planner with an MBA and a degree in psychology. She’s the President of LifeDesign Financial and co-founder of the Women’s Financial Learning Centre.