tax on investment income

How To Minimize Tax On Investment Income

Different types of investments can offer different benefits. There are also different ways that your investments can be taxed. Sometimes it can get a bit confusing. In this post, we’re going to look at three ways your investments may be taxed and strategies you can use to minimize the tax on investment income you generate.

While business leaders tend to succeed because they possess rare skills and a laser focus on their respective industries, sometimes it’s important to tap the brakes. By enlisting the support of an experienced accounting firm, professionals can reduce their tax on investment income.

How Are Your Investments Being Taxed?

Although taxes are one of life’s certainties, they prove complicated in Canada. The government considers the mechanisms everyday people utilize to generate income and assign different tax methods and rates. The tax on investment income often depends on a person’s marginal bracket and the revenue source. These are ways tax on investment income typically works.

  • Income From Interest: The income generated from interest on bonds, for example, ranks among the hardest tax hits. This source of revenue is usually subjected to the full weight of someone’s highest marginal tax rate.
  • Dividends: If the dividend payment you received comes from a Canadian source, it may be eligible to be taxed at a lower percentage than your marginal income bracket. A foreign company’s dividend is typically ineligible and, therefore, taxed at a higher rate.
  • Capital Gains: Fifty percent of profits from the sale of assets are usually added to adjusted gross income and taxed at someone’s marginal rate. While half of the capital gain is not subject to taxation, sudden spikes in income can drive business professionals into higher brackets.

Canadian residents routinely invest in American companies, and professionals would be wise to consider the tax implications. While upwardly mobile entities attract global investors, Canadians can anticipate paying up to 30 percent withholding tax on foreign dividends.

Tax on Investment Income Questions Worth Considering

Proactive business professionals thrive by making savvy decisions and quickly following through with a plan of action. But people outside the accounting trades may not realize the tax on investment income liability they are inadvertently creating. Consider the following questions and talk to an expert before making financial moves.

Are You Effectively Managing RRSP and TFSA Contributions?

Both the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Accounts (TFSA) rank among the best small business tax deductions available. Sole proprietors and partners can derive significant benefits. These tax shelters are driven by maximum contributions, marginal tax rates, and can also be carried forward. Increasing contributions when your salary is high could reduce your marginal tax rate and overall liability.

Do You Have a Capital Gains Tax Strategy?

The taxes on capital gain profits continue to prove complicated, and professionals sometimes pay more than required. Liquidating assets to increase revenue can drive industry leaders into higher brackets because they failed to take advantage of deferment options and exemptions.

How Can Non-capital Losses Save Money?

It sounds counterintuitive, but sometimes a loss can save an organization money. Should a small business or non-profit experience higher expenses than revenue, the shortfall can be put to work. But that financial hit doesn’t necessarily have to be taken for the year you lost money. These losses can be carried forward to strategically lower your tax liability.

Do Non-profits Pay Tax on Investment Income?

The Canada Revenue Agency treats non-profits and charities differently. Although neither can use income as a member perk, charities are largely tax-exempt. Because there is significant overlap between non-profits and charities, it would be wise to know whether an organization qualifies as tax-exempt. An experienced accounting firm can help answer that question and do the paperwork to save you money. If you operate a small business or lead a non-profit organization, knowing the tax on investment income implications can help you make informed decisions.

At Avisar Chartered Professional Accountants in Langley, British Columbia, our experienced team works diligently with private sector and non-profit business leaders to minimize tax liability and plan for success.

Book a free consultation to talk about your investment tax strategy.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.