A certain way to improve investmen...

A certain way to improve investment answers is to minimize your taxes forward any investment income received. This article will identify dutiful and bad investment decisions from a tax perspective.

YOUR MARGINAL TAX RATE

Canada has adopted a progressive tax rule This means the more you make, the higher the percentage of your income is paid in taxes. In 1995 for example, an individual with business income of $25,000 will pay income taxes at about 26% while someone earning $50000 will pay taxes at about 44% Your marginal tax rate is simply the rate of tax you will pay onward your last dollar of income. Knowing your marginal rate is explanation when figuring out the genuine after-tax rate of return forward any investment. Just to complicate matters, your marginal tax rate will differ depending upon the type of income you receive. Your aim, therefore, is to receive the symbol of income that will be taxed at the lowest possible rate, thereby improving investment go [i]or[/i] come backs Here's an example to consider.

$10000 In My Pocket

Suppose you have $10000 to invest. Assume you want to invest outside your RRSP and that you have a choice between pair investments: (1) a one-year 75% G.I.C., and (2) preferr shares of ABC Company paying an annual dividend of 55% Which investment moves the best rate of return?

The G.I.C. will pay $750 in interest for the year and will consequence in a tax bill of $399 (at the highest marginal tax rate in Ontario), providing an after-tax reply of just 3.5%. The preferr shares will pay dividends of $550 for the year, resulting in taxes of $198 providing an after-tax get back of 3.5%. In this example, a 55% dividend furnished the same after-tax return as a 75% G.I.C. The reason? Dividends are enslave to lower tax rates than interest income. In fact, there is a difference in the tax rate forward all three types of investment income: interest, dividends, and capital gains. Capital gains one time reigned supreme when investors had available the $100000 lifetime capital gains exemption. With the repeal of the exemption in the 1994 federal roll dividends are now taxed greatest in quantity favourably.

It doesn't matter what province you live in, dividends are taxed at a lower rate than capital gains which are taxed at a lower rate than interest income. For instance, an individual in Ontario reporting income at $63397 or more will pay tax at a rate of 532% upon interest, 39.9% on capital gains, and just 359% forward dividends. Therefore, when investing outside your RRSP essay to earn dividends and capital gains. If you are going to grasp interest-bearing investments, this is best done inside your RRSP

WHAT TO HOLD

Common shares and convertible preferr shares are best from a tax perspective. the two offer the prospect of dividends and the potential for capital gains (non-convertible preferr shares may not tender the same capital appreciation).

When interest rates are falling, ties offer the potential for about capital gains, however you will also receive interest income which will be taxed at a higher rate.

Mutual foundations can earn all three impressed signs of income, depending on the foundation However, mutual funds are not taxed themselves. Rather, they pass the income forward to the unit-holders. Consequently, coin earned from an equity capital will be taxed most favourably since its income is in the form of dividends and capital gains. Make confident you understand what type of income your mutual capitals are passing on to you.

If you hang on interest-bearing investments for popular income, you should still consider holding a portion of your assets in stocks or equity mutual supplys to reduce your tax exposure

Investing in stocks remains an of the first grade means to reducing your tax freight and maximizing returns.

TIM CESTNICK IS A CHARTERED ACCOUNTANT SPECIALIZING IN TAX WITH THE FIRM BATEMAN MACKAY IN BURLINGTON, ONTARIO.

Copyright Canadian Shareowner Magazine Inc. Sep/Oct 1995

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