Can I reduce my income tax by deducting interest paid on money borrowed to buy investments?
Are there different tax rates depending on what kind of investment income I have?
Are there different tax rates depending on what kind of investment income
I have?
Yes. Here's how different investments are taxed:
- Interest
Interest income is fully taxable. This means that if you are in the 40 per cent tax bracket, $40 of every $100 of interest income you earn will go to Revenue Canada and you keep $60. There is no particular tax break. In the case of GICs, you pay tax on the interest you earn annually even though you might not actually get paid that interest for a number of years.- Capital gains
Capital gains do come with a tax break. Only half (50 per cent) of a capital gain is taxed. So if you bought a stock for $100 and sold it for $200, only $50 -- not $100 -- of your capital gain would be taxed. If you are in the 40 per cent tax bracket, you will pay $20 of tax and keep $80.- Dividends
Dividend income from taxable Canadian corporations gives you more favorable tax treatment than for interest income. To determine the taxable amount, dividends are first "grossed up" by 25 per cent That means $100 in dividend income becomes $125 of taxable income. But the government also gives investors a dividend tax credit equal to 13.33 per cent of that $125 taxable amount. Assuming a 40 per cent tax bracket, you would end up paying about $25 in tax and keep $75.
Do you have to pay tax on the capital gains earned by yourstock if you
haven't actually sold the stock?
In most cases, you don't pay taxes on a capital gain until you sell that stock.
If you bought a stock in 1995 and sold it in 1998 for more than you paid for it, you would have a capital gain for which you'd have to pay tax in 1998. That would be the case even if all or most of the gain was earned in 1995, 1996 or 1997. Generally, the tax becomes payable when you actually realize the capital gain by selling.
Why is paying off
personal debt a good investment?
When you pay down personal debts such as your mortgage or credit card bills, you give yourself a big return on your money.
The reason is that interest on personal debts isn't a deductible expense off your income tax. The interest you pay on personal debt is paid with after-tax dollars
By paying off personal debt, of course, you will also eliminate a drain on your cash flow. And with that freed up cash, you have money available for more productive uses - like investing. You should first pay off loans with the highest interest, since that will give you the greatest savings.
If you keep your debt under control, you are better able to cope with any unexpected expenses or loss of income.
Business Office At Home
Be sure that adequate salary and bonus are incurred by year end to support the personal RRSP contribution you want to make in the following year.
If your home office is either:
- Your principle place of business or
- Is not your principle place of business, but is both used exclusively for earning business income and used on a regular and continuous basis for meeting your clients, customers, or patients
You may deduct home expenses related to that space. Deductible expenses will include a prorated portion of such items as taxes, rent, electricity, repairs, heat and insurance.
Interest
on Child Tax Benefits
If the spouse receiving Child Tax Benefits payments has other income subject to tax, consider putting the child tax benefit payments in bank accounts held jointly by the spouse and each child. As long as income on these accounts is treated consistently as that of the child it will be taxed to the child and not the spouse.
If you are sixty five years old or older, you should see if you can arrange to have one thousand dollars of pension income, on which you can receive a tax credit which will reduce the tax on the thousand dollars. One way to accomplish this is, if you are not yet sixty nine, transfer sufficient RRSP funds to a RRIF to produce a one thousand dollar annual income.
Medical Expenses include premiums paid to private health insurance plans such as Blue Cross, and supplementary coverage while outside Canada.
If you are self employed and pay private health insurance plan premiums for yourself and your family, you should consider deducting the expense rather than claiming the credit for these premiums.
Filing
Tax Returns for Children
The primary advantage of filing tax returns for your children with earned income is the children will accumulate RRSP room, even if their taxable income is well below taxable levels.
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