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A dollar is not a dollar

By Anne Chun, C.A., CFP



March and April are the months in the year when all sorts of tax slips are arriving the mail, and the income tax filing deadline of April 30th begins to weigh on us all. I sometimes get anxious phone calls from clients who want to file their income tax returns as soon as possible.

From a tax preparation perspective, we concentrate on the tax slips that clients provide for their return that is to be filed. From a tax planning perspective, I advise clients to consider their current tax situation at the beginning of each year rather than wait until tax time. It's never too late to start planning now.

In the eyes of the Canada Customs & Revenue Agency, a dollar is not a dollar.

Each dollar is not taxed the same way. In my book, 'Planning Your Financial Future', I suggested that if you review and change the types of income you receive, you may be able to reduce your taxes.

For instance, if you are paid on commission rather than salary, there are expenses that you can deduct for tax purposes that a person who earns salary income cannot. This includes expenses for your automobile such as gasoline, repairs, maintenance, insurance, parking, car loan interest/lease payments, and a portion of the cost of your car in the form of depreciation. So if you can negotiate your remuneration to be at least partly commission based, you can save taxes.

Another tax planning recommendation, that may be of special interest to retired persons and others who have investments, is that you should consider receiving dividend income rather than interest income.

Investments such as government or corporate bonds, Guaranteed Investment Certificates, Canada Savings Bonds pay interest income on a regular basis. These kinds of investments are often favored by retirees because they receive a regular income to replace the salary they used to have. These investments are often safe and suitable for investors who are risk averse.

The safety feature provides peace of mind but with safety, there usually is a price. The price you pay includes a lower "yield" or return on your investment, AND, a higher amount of tax.


Investments in preferred shares or common shares of companies that pay a regular dividend may be a better alternative. Amongst those dividend-paying companies, some are less volatile and "safe" than others. Dividends are taxed at a lower rate than interest income, so that your "after-tax yield" may be higher than the "after-tax yield" of your bonds and GICs. "After-tax yield" is the amount of interest or dividend you keep after paying the tax man.

If you are retired and have sufficient income to live on, you may not need any dividend or interest income from your investments. In this case, you may wish to review and change your portfolio and save taxes each year. By choosing investments that do not pay dividend, you do not have to pay tax until you sell your investments AND on only 50% of your capital gains.

Let's look at the "after-tax yield" of interest, dividends and capital gains for someone with taxable income of $40,000 living in Ontario. If you earn an additional $1,000, you will keep, after paying tax, $844 if this is capital gains, $842 if this is dividends and only $689 if this is interest income.

As you can see, a "dollar is not a dollar", and you should be mindful of the what your investment earns on a after-tax basis, NOT on a before-tax basis.

This applies to investments in mutual fund investments also.

If you invest in mutual funds, you should review the tax slips you receive. The tax slips, which could be either T-5s or T-3s, will indicate whether this fund has made distributions in the form of interest, dividend income or capital gains. You have to include these amounts on your income tax return and pay tax on the distributions. You can be proactive by reviewing the prospectus of the mutual fund. In the prospectus, look for the Investment Objectives of the fund will be making. Do these investments pay dividend or interest, or is the fund investing in growth companies which often do not pay dividends and you may realize a capital gain?

If you are considering the purchase of new mutual funds, be sure to review the Investment Objectives and Income tax considerations to ensure that this is the most "tax efficient" investment for you.

Most of my client are too busy to monitor their investments all the time. When they file their income tax returns, I take this opportunity to review their taxes and investments mix with them, you should consider doing the same with your accountant or financial planner.