One of the very few tax breaks left to average Canadians is the Registered Retirement Savings Plan (RRSP). But there are federally imposed limits on the amount of money you can invest in your RRSP, so you may not be able to achieve the later-in-life wealth level you want through investments in your RRSP alone. That?s why a well-rounded investment portfolio should also include a mix of non-registered investments.
Unlike RRSPs, your non-registered investments are not sheltered from taxes. Your task then becomes selecting non-registered investments that are the most tax-efficient and capable of delivering the kind of returns you need over the long term.
It?s usually a good strategy to place interest-bearing investments inside registered plans and investments that enjoy a preferential tax treatment outside your RRSPs in a non-registered portfolio. Here?s why:
For income tax purposes, dividends from qualifying Canadian corporations receive preferential tax treatment. The formula is a bit complicated, but the bottom line is that a dollar of dividend income is taxed more favourably than a dollar of interest income.
Capital gains receive a preferential tax treatment, in that only 50% of the gains are taxable. You control when you pay taxes on capital gains because they are not taxed until they are realized. You can also use realized capital losses to offset your realized capital gains – choosing when to use your realized capital losses by carrying them forward (indefinitely) or backward (for three years only).
Continued next week?
This column is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your financial advisor.