Some investments can protect your wallet from taxman
Q: I am newly remarried and in the top 10 per cent income bracket. Currently, I own various forms of investments, including stocks, mutual funds, income funds, RRSPs and real estate. I would like to consolidate my holdings and concentrate on more specific areas. The past week, I was introduced to some tax-shelter investments that offer great tax savings. What would be my best investment, and are these tax shelters great investments?
A: Investors are continuously faced with the predicament of “what should I invest?” Money is a limited resource and therefore we all would like to keep as much as possible. Investors must look at the overall return including the growth potential, annual yield and tax implications of the investment.
Non-registered investment income attracts different tax rates depending on the type of income. Understanding how income is taxed is an important component when making a decision about the type of investment to hold.
Interest and other income: Generally, investors receive from term deposits, bonds, real-estate rents, foreign income, bank accounts and the like. Taxpayers will receive a T5, T3 tax slip before the end of February and March of the year following the reporting period to include on their tax return.
Dividends: Listed companies on major Canadian stock exchanges would pay “eligible” dividends. Canadian dividends are taxed at a preferential rate.
Capital gains: An investor would incur a capital gain from the sale of investments such as the sale of stocks, real estate holdings and the like. Fifty per cent of the capital gain is taxable at the individual’s tax rate.
There are various types of tax shelters including limited partnerships, labour sponsored funds,
Canadian films, oil and gas and the no longer available MURBs (Multi Unit Residential Buildings).
The safety of your principal and quality of investment is more crucial than the attractiveness of the tax savings offered by a tax shelter. What is the purpose of a 70 per cent tax saving on a $100,000 low-quality investment if you lose all you’ve invested?
The following is a checklist for potential tax shelter investors from Deloitte, one of Canada’s leading professional service firms “How to reduce the tax you pay” publication may offer some guidance:
- Ask for the prospectus or documentation relevant to the tax shelter.
- Consider any statements or opinions explaining the income tax consequences of the investment.
- Get any and all assurance concerning the shelter in writing.
- Obtain from promoter any advance tax rulings provided by CRA.
- Seek professional advice.
Education and professional advice are key elements that should never be taken for granted.
Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Any questions to Money Matters should be e-mailed to firstname.lastname@example.org