Category Archives: RRSP

Canadian Tax Rates for Investment Income

What you need to know about Canadian tax rates for investment income
What you need to know about Canadian tax rates for investment income

As anybody North of the 49th will tell you, there are certain aspects of being Canadian that we all revel in.

Paying tax is not one of them.

With tax season just passed, it seems like a good time to take a look at the various ways the government pries your investment return dollars out of your wallet.

When I was first getting into investing, I invested a lot of money into a Mortgage Investment Corporation. It provided quite good monthly returns, and I can still remember being pretty pleased with myself that the investment was throwing off almost $500 a month. Tax time brought a cold shower, a slap in the face, and a wakeup call all rolled into one. Unlike taxes paid on working income, investment taxes are all paid once annually, at tax time. At this point, I don’t remember exactly what the tax hit was, but for a person of my modest income, it was substantial. Coincidentally, it was about that time that I became aware of a fact that has had a major impact on my investing practices since then.

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The Rule of 72

72When comparing the rate of return on investments, it is helpful to have a consistent standard.  By far the most common standard is to simply compare the annualized rate of return.  If investment A return 3% and investment B returns 5%, the risk of the two choices being equal, the obvious choice is investment B.

That is good as far as it goes, but what does it really mean in terms of long-term growth?  In other words, how meaningful is that 2% difference?

The Rule of 72 allows you to measure investment returns in term of time instead of percentage points.  If you use doubling time (how long will it take for money to double) as a standard of measure, you can see how long your investments will take to bear fruit.

 

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