Try
to earn your investment income (outside of RRSPs) at the lowest tax rate
possible.
All capital
gains and Canadian
dividends are taxed at lower rates than other income such as interest and
foreign dividends.
Interest income and dividend income are
received or accrued each year, and are taxable
in the year you receive or accrue the income.
You have no control over which year the income is
paid. You are not taxed on capital gains until your investment is sold, so you have
some control over which year you receive the income, because you can choose
when to sell your investments.
If you have no income
other than Canadian dividend income eligible for the
enhanced dividend tax credit,
you can earn approximately $49,000 before any federal tax is
payable. For every $100 of these dividends, $145 (grossed-up
amount) is included as
taxable income (the extra $45 is called the dividend
"gross-up"). Then taxes are reduced by
the enhanced dividend tax credit, resulting in a low tax rate. See
the Dividend Tax Credits
page for federal and provincial rates, and information
on how much can be earned in each province before taxes are
payable.
If you have no income
other than capital gains income, you
can earn approximately $18,000 before any federal tax is
payable. The tax paid on capital gains is low, because only 50%
of capital gains is taxed, and the gains are not taxed until the
investments are sold, except in situations where there is a
deemed disposition. A deemed
disposition can occur, for example, upon the death of
a taxpayer, or when an investment is transferred into an
RRSP, or if the
investment is given as a gift. See Reduce
capital gains taxes by donating capital property on our Filing
Your Return page.
If you have a capital loss, it can be used to
reduce capital gains. Capital losses cannot usually be
used to reduce other income. However, capital losses can be carried
back up to 3 years to be offset against prior capital gains, and can be
carried forward indefinitely. The only time they can be used to reduce
other income is in the year of a taxpayer's death, or the immediately
preceding year. At this time, 50% of the capital loss would be used to
reduce other income. For more on this topic,
see the Canada Revenue Agency interpretation bulletin IT232R3
- Losses - Their Deductibility in the Loss Year or Other
Years (paragraph 30).
