Taxes play a crucial role in how much of your investment returns you actually keep. For Canadian investors, it’s important to understand how dividends and capital gains are taxed, especially when investing outside of tax-advantaged accounts.
Dividends
- Eligible Dividends (from Canadian public corporations) benefit from the dividend tax credit, reducing the effective tax rate.
- Non-eligible Dividends (typically from small businesses or private corporations) receive a smaller credit.
- Foreign Dividends (e.g., from U.S. stocks) are fully taxable at your marginal rate and often subject to a 15% withholding tax.
Capital Gains
- You only pay tax on 50% of a capital gain (called the “inclusion rate”).
- This gain is calculated as the sale price minus the adjusted cost base (ACB) of the asset.
- Losses can offset gains in the same year or be carried forward/backward.
Tax-Efficient Strategies
- Hold Canadian dividend-paying stocks in non-registered accounts to benefit from tax credits.
- Keep U.S. stocks in RRSPs to avoid U.S. withholding tax (thanks to a tax treaty).
- Use TFSAs for growth stocks to eliminate capital gains tax entirely.
- Harvest tax losses strategically to reduce future tax bills.
Final Thoughts
Understanding the tax treatment of different investment types can help you make smarter decisions about what to hold where. Use registered accounts strategically, and don’t forget to track your ACB for accurate reporting.
By optimizing your tax approach, you can enhance your after-tax returns and build wealth more effectively.