Taxes may be inescapable, but your choice of investments can have a huge impact on how much tax you pay.
It all depends on your personal situation and how you structure your investment portfolio.
3 types of investment income and how they work
A basic investment portfolio can generate three types of income:
- Interest income. If you have a savings account or a money market fund, you will receive interest income. Ditto, if you have a fixed income or bond component in your portfolio. A five-year Government of Canada bond, for example, may have a “coupon” of 2.25%, meaning for every $1,000 invested, you will receive $22.50 in interest each year. If your bond component is held in a mutual fund trust, you will receive annual “distributions.”
- Dividend income. If you buy shares in publicly traded companies, you may receive dividends, a company’s way of sharing its profits with its shareholders. You will receive a certain amount per share quarterly, semi-annually or annually. Likewise, you can receive dividend income from a mutual fund that buys dividend-generating stocks and makes an annual distribution to unitholders like you.
- Capital gains or losses. If you sell your company shares, your mutual fund units or a bond you own before its term expires, you may generate a capital gain or loss. For example, if you bought shares in ABC Co. for $10 each and sold them for $20 each, you would have a $10-per-share profit. That is a capital gain. If, on the other hand, you bought at $20 a share and sold at $10, you would have a loss of $10 per share. That is a capital loss.