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MONEY SENSE: How do taxes affect your investments?

Please pay careful attention to the income tax consequences of your investment decisions. If you hold interest-paying instruments in an RRSP/RRIF, for example, you shelter the interest from tax.
grenby october 11

Please pay careful attention to the income tax consequences of your investment decisions.

If you hold interest-paying instruments in an RRSP/RRIF, for example, you shelter the interest from tax. But if you hold dividend-paying Canadian shares in a tax-sheltered plan, while you defer tax on the dividends you lose the benefit of the Canadian dividend tax credit. If you hold such shares outside an RRSP/RRIF, you pay a reduced rate of tax on any capital gains. Inside a plan the tax is deferred. . . but then your profit is fully taxed when you withdraw the funds.

You must consider time and tax bracket factors. For example, having the full amount of the sale of shares in an RRSP/RRIF available to reinvest could more than make up for the full taxation on withdrawal, especially if you are then in a lower tax bracket. If you have capital losses outside a tax shelter, you may use them to reduce capital gains. Inside the tax shelter this rule doesn't apply.

When you deduct rental, business and similar losses from your other income, you end up with less money than if you were declaring a profit.

So, how much after-tax profit must you eventually realize to more than make up for these after-tax losses - once again, taking into account the time value of money? For example, because of inflation you will need more than an after-tax $100 profit in the future to make up for an after-tax $100 loss today.

To add to the uncertainty, nobody can predict future investment behaviour or what tax changes could take place.

If all these factors and calculations overwhelm you, seek a tech-savvy financial advisor to run the various scenarios for you.

Don't be afraid to ask questions. But first, learn enough of the basics so you know what questions to ask - as in: "What effect will the tax rules have on my investment portfolio?" While tax is only one factor to consider in investment decisions, it is an important one.

Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email mike.grenby@gmail.com