Keep more to grow more
Author: Sound Choices
March 14, 2019
The content in the article below is meant for Canadian investors only.
One of the best ways to maximize your savings is to take advantage of tax-sheltered plans.
If you held an investment outside of a tax-deferred plan, you are required to report the following income on your Canadian income tax return*:
- Distributions in the form of interest, dividends or capital gains paid to you by any fund, including those reinvested
- Gains (or losses) realized when selling or redeeming units or shares of your fund (except conversions of different series of the same Class or reclassifications of different series of the same Fund or Portfolio)
On the other hand, distributions on funds held in a tax-sheltered plan – such as a Registered Retirement Savings Plan (RRSP), a Registered Retirement Income Fund (RRIF), a Registered Education Savings Plan (RESP), or a Tax Free Savings Account (TFSA) – do not need to be reported as taxable income as they are automatically reinvested in registered plans. Taxes are reported and owed only when money is taken out of the registered plan (the exception being a TFSA).
For example, let’s say you decide to set aside $500 a month. Maybe you want to save for a dream vacation. Or a new car. Or to renovate your kitchen.
Does it really make a difference if you put the money into a tax-sheltered plan, such as a TFSA, which can be used for any financial goal?
The chart below shows:
- the same amount of money ($500/month) being invested in the same product (a hypothetical investment with a 5% annual return)
- the only difference – Investor A chose a TFSA account, while Investor B chose a non-registered account
After one year, the amount may not seem significant but it makes a big difference over a longer time period.
Source: AGF Investments Inc. Performance returns presented are hypothetical and for illustrative purposes only. It does not represent actual performance. Assumptions were made in the calculation of these returns including $500 invested at the beginning of each month in a hypothetical investment with a rate of return of 5%. Of the 5% return, distribution yield of 2.0% (distribution composed of 50% interest and 50% capital gain). Interest taxed in the year received, while unrealized capital gains were taxed at the end of the holding period. Marginal tax rate of 50% for interest and 25% for capital gains, distributions reinvested. Taxes paid from out of pocket (not from sale of shares). Trading costs and other fees associated with the portfolios are not included and trading prices and frequency implicit in the hypothetical performance may differ from what may have actually been realized at the time given prevailing market conditions. This performance simulation is for illustrative purposes only and does not reflect actual past performance nor does it guarantee future performance.
* For more detailed information on the tax treatment of income received by an individual from Canadian mutual funds, refer to Canada Revenue Agency (CRA) information guide RC4169 – “Tax Treatment of Mutual Funds for Individuals”.
This information is based on material believed to be reliable and is provided as a general source of information and should not be considered any personal investment or tax advice. Every effort has been made to ensure accuracy at the time of publication, however AGF Management Ltd. and its affiliates cannot guarantee 100% accuracy of this information, and is not responsible for the development and creation of this material. It is important for investors to consult with their financial and tax advisors before making any investment or tax planning decisions.
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