From our annual Tax Tips guide, here are the tips and suggestions related to Investment Income, Capital Gains and Losses for the year 2017.
Investment income
1. Tax rates are significantly more favourable for dividend income than interest income.
- The top personal tax rates in Ontario
for 2017 are as follows:
Income 2017 For taxable income over $142,354 to $150,000 For taxable income over $150,000 to $202,800 For taxable income over $202,800 to $220,000 For taxable income over $220,000 Eligible dividends (generally, dividends received from public corporations) 29.52% 31.67% 37.19% 39.34% Non-eligible dividends (generally, dividends received from small business corporations) 36.97% 38.79% 43.47% 45.30% Interest income 46.41% 47.97% 51.97% 53.53% Capital gains 23.20% 23.98% 25.98% 26.76% - The top personal tax rates are not expected to change for 2018, except for the non-eligible dividend rates. The top marginal rate for non-eligible dividends will increase from 45.30 per cent to 45.74 per cent in 2018 and 46.75 per cent in 2019.
- Re-evaluate your investment strategy by comparing the pre-tax dividend rates with the pre-tax interest rates using the chart provided on page 15.
2. Defer tax on interest to the following year by investing funds for a one-year term ending in the next calendar year.
3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated in the current year from the mutual fund.
4. Existing holding companies that have built up refundable dividend tax should consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay personal tax on the dividend. The individual circumstances should be reviewed.
Investment income – A closer look
It may be a good time for you to consider whether your investment income is tax efficient and consider investment alternatives. The table below has been prepared to assist you in this matter. It assumes that your investment goal is to earn an after-tax rate of return of 5%. It compares the pre-tax yield required to achieve a 5% after-tax rate of return by earning:
- Interest income;
- Eligible dividends (generally dividends received from public corporations); or
- Non-eligible dividends (generally dividends received from small business corporations).
| If your total taxable income is: | The pre-tax rate of return required to achieve a 5% after-tax rate of return is approximately: | ||
| If you receive interest income | If you receive eligible dividends | If you receive non-eligible dividends | |
| Between $1,000 and $45,916 | 5% – 6.6% | 5% | 5% – 5.6% |
| Above $45,916 but below $91,831 | 7.1% – 8.1% | 5.3% – 6.1% | 6.1% – 6.9% |
| Above $91,831 but below $142,353 | 8.8% | 6.7% | 7.5% |
| Above $142,353 but below $150,000 | 9.3% | 7.1% | 7.9% |
| Above $150,000 but below $220,000 | 9.6% | 8% | 8.8% |
| Above $220,000 | 10.8% | 8.2% | 9.1% |
Capital gains and losses
5. If you own qualified small business corporation (QSBC) shares or qualified farm and fishing property, you may benefit from the lifetime capital gains exemption of $835,716. The exemption is indexed to inflation annually.
- The Government has maintained the exemption of $1,000,000 for qualified farm and fishing property. The exemption is available on dispositions made on or after April 21, 2015.
6. Consider realizing accrued losses on investments to shelter capital gains realized this year and/or in the previous three years.
- Note that a loss realized from the disposition of an investment may be denied if you repurchase the investment within a short period of time.
7. If you have significant trading activity, your sales of securities may be considered a business for income tax purposes.
- If your sale of securities is considered a business, your profits will be fully taxable as income (instead of being considered capital gains taxable at 50%), and your losses will be fully deductible against any source of income.
- If you are concerned about your sales of securities being considered a business, you can consider filing a one-time, non-revocable election with the Canada Revenue Agency (CRA).
- This election will treat all of your gains from dispositions of Canadian securities as capital gains (and all of your losses as capital losses) for the current year and all future years.
Did you know?
In October of 2017, the Government introduced proposed rules surrounding the earning of investment income through a private corporation. These rules may trigger adverse tax consequences when a corporation that has paid tax at the small business deduction rate, or the general business rate of 26.5 per cent (Ontario) earns more than $50,000 of investment income on new invested after-tax business profits. According to the proposals released by the Liberal Government, existing investments that are held in the corporation before the effective date of the rules, will be grandfathered from these new rules. We expect draft legislation to be released by early 2018.
Click here to download a full copy of the Tax Tips 2017 Guide (PDF).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
