Taxation and Other Investments

How does the list on the right differ from the list on the left?

apple apple tree rents apartment building

Think hard….

apple apple tree rents apartment building

interest GIC

One More….

apple apple tree rents apartment building

interest GIC

dividends stocks

Share your thoughts with a partner…

apple apple tree rents apartment building

interest GIC

dividends stocks

operating income owning a business

The Results:

Income vs. Capital

The left-hand column describes items that are recurring in nature. They are considered income.

The right-hand column describes items that are more like property. They might generate income (items in the right-hand column)

Income versus Capital

INCOME CAPITALRegular or recurring in nature. It is reported on your personal income tax forms.

Is property. You can buy capital with the money you have.

Capital will hopefully generate regular income.

You use capital to make investments.

Taxation of Investments

You decide to make an investment. How do you generate a return (i.e. how do you make money?)

Two Ways: Income Capital Gains/Losses

Marginal Tax Rates

This tax rate describes what percentage of tax you pay on the next dollar earned.

When you combine federal and provincial tax rates, our marginal tax rates are quite high.

See your handout!

Income

Two types you should know about:

1. Interest Income: Interest on bank accounts, bonds, GIC’s.

2. Dividends: When the company decides

to share part of its income with shareholders.

Different types of income are taxed at different rates.

Interest Income

Is reported on a T5 form issued by the bank or financial institution.

100% of the interest income is subject to tax.

Dividend Income

These rules are more complex. In 2014 you must first “gross-up”

your dividend income by 38%. Then, you can apply the dividend tax credit of roughly 15% of this “grossed-up” amount.

An Example:

John earns $100 in dividend income. Assuming he is in a 46.41% marginal tax bracket, how much tax will he pay on his dividends?

Step 1: “gross-up” $100 x 1.38= $138 Step 2: Calculate credit $138 x 0.15 = $20.70Step 3: How much tax would he have paid before credit? 100 x 0.4641 = $46.41Step 4: Apply credit $46.41-20.70 = $25.71

Capital Gains Vs. Capital Losses

When you sell capital, two things can happen:

1. You make money (a capital gain) 2. You lose money (a capital loss).

Only 50% of your capital gain/loss is taxable at your regular marginal tax rate.

Why is this important?

Because Canadians pay a lot of tax! Before you invest, it is important to

understand the tax implications of doing so!

Talk to a tax planner or financial advisor to determine what investments are right for your personal tax situation.