7.3.4 Taxes and investments
Taxes, like sales agents' and brokers' fees, affect the return you receive on your investments. But they affect different investments in different ways. For example, you have to report interest income yearly and pay tax on it, but you can make certain deductions from income that you receive from share dividends. You don't have to pay income taxes on capital gains until you sell or transfer the investment and receive some income, and then you pay tax only on half of the value you earn. (The actual rate of tax you pay depends on which tax bracket you are in.) As a result, capital gains can provide a better return on investment than interest income over the long term—if you have time to recoup the losses when the marketplace falls.
The effect of taxes on different types of income and different types of investments can be important when you plan your investments. Taxation is a complex field with many specialized rules. Unless your investments are very simple, it is helpful to get advice on tax planning from an expert. See the module on Income taxes for more information.
Registered savings plans
To encourage savings and investment, the Government of Canada has created a variety of registered savings plans that offer tax benefits to investors. They let you avoid or delay some of the taxes you pay. They are generally called registered savings plans because they must be registered with the Canada Revenue Agency in order to qualify for tax benefits.
There are two main types of investment plans with tax benefits.
- Tax-Free Savings Accounts (TFSAs) let you put money in a registered plan, and any income the plan earns is tax-free.
- The maximum amount you can put in a TFSA is $5,500 a year (but if you did not contribute the maximum in previous years, you may be able to contribute more).
- A TFSA can include any type of investment. Returns may be guaranteed or they may not, and some types of investment can lose money.
- For details, go to the Canada Revenue Agency’s information on The Tax-Free Savings Account.
- Registered Retirement Savings Plans (RRSPs) let you put money into a registered plan and avoid paying taxes on the money and any earnings it produces until you take it out of the plan.
- An RRSP can include any type of investment, with their associated risks and costs.
- The maximum amount you can put into an RRSP depends on your income. It's listed on the Notice of Assessment that the Canada Revenue Agency sends you when you file your annual tax return. For example, the maximum limit for 2017 was $26,010. If you did not contribute the maximum in previous years, you may be able to contribute more.
- To calculate the difference between putting money into an RRSP and a non-registered investment, try the RRSP savings calculator from the Ontario Securities Commission.
- For details, go to the Registered savings plans information by the Canada Revenue Agency.
TipFebruary is the last month you can put money in your RRSP to get a tax deduction for the previous year. But don't wait until February. Make regular bi-weekly or monthly contributions and your savings will start to grow sooner.
Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) are investments (with tax benefits and government contributions) to pay for a student's education or to assist someone with a disability.
Quebec has a student savings plan. For information, go to:
Many conditions apply to registered savings plans. Be sure you understand them so you can decide if they are the best way for you to meet your savings goals. Find out what fees and conditions apply. Some key questions are:
- Are there rules about how much I can save each year?
- When do I contribute?
- Who will invest my money?
- How fast will my money grow?
- How much will this plan cost?
- What happens if my plans change?
For more consumer tips, read Before you sign any contract: 10 things you need to know by the Financial Consumer Agency of Canada.
For more information, see the video Investing with registered savings plans.
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