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Newsletter Q&A

Every week, I challenge readers to a skill-testing question! See how well you understand personal finance and investing by signing up to my newsletter.

Sept 19, 2023

What kinds of income are you allowed to split with a spouse in retirement?

If one spouse has far more income than the other spouse, they would probably benefit from income splitting. This evens out the income between them and lowers the overall tax bill. 

The types of income you can split in retirement include: 

  • Payments from a pension plan

  • RRIF payments (an RRSP becomes a RRIF in retirement) and LIF payments (a LIRA becomes a LIF)

  • Canada Pension Plan (CPP) payments

  • Annuity payments

  • Payments from certain foreign pension plans

There are others, but these are the main ones. For pension, RRIF and annuity payments, you make the election to split the income on your tax return and this split can change year-to-year. If you want to split CPP payments, you need to make an election with the CRA by completing a form. This pension split will remain the same year to year unless you request to cancel it.

 

Another way to split income in retirement is by using a Spousal RRSP.

There are more rules around income splitting so make sure you do some thorough research before jumping in! 

Sept 13, 2023

Which type of investment income is taxed the least favourably: capital gains, interest, or dividends? 

Interest income.

You earn interest income from savings accounts, GICs and bonds. This income is taxed like regular income. You simply add it to your employment income and calculate your overall tax payable.

Capital gains are quite favourably taxed. You receive capital gains when the value of your stocks, ETFs or mutual funds goes up. If you hold these in a regular/non-registered account, you will realize a capital gain when you sell the investment. You'll have to pay income tax in the year you sell. However, the good news is that you only have to pay tax on half of the capital gains, not all of it.

Dividends are also favourably taxed due to the dividend tax credit. The dividend tax credit allows you to reduce your overall tax payable on the dividend income. Whether dividends or capital gains are a better deal from a tax perspective depends on how much total income you have. In fact, if your total income (employment+pension+CPP+OAS+RRIF+investment income) is below about $50,000, you pay no tax on dividends. 

When a fund is actively-managed, it means that someone or a group of people are picking and choosing stocks. "Should we buy more Amazon?" "Should we sell Dollarama?" They do this all day long, all week long, all year long. These people have to be paid. In addition, a mutual fund sales person or investment advisor has to sell the funds to the general public. In order to incentivize a salesperson to sell a particular fund, the fund company pays them an ongoing commission, called a trailing commission. This cost of this "trailer fee" is included in the fee you, the investor in the fund, pays. There are other fees involved as well, but these are the big ones. 

 

ETFs that are passively-managed don't have to pay anyone to pick stocks, and also don't (usually) pay trailer fees to salespeople, making them much cheaper for investors. 

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