Managed Money Reporter Newsletter — Issue 146, April 1999 Editors: Carl Spiess & Allan McGlade

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Featured Articles

• Investment and Taxation
• LSIF Tax Credits
• Attention All 'Parkers'

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The Tax Man Cometh

The effect of taxation on your bottom line cannot be ignored when it comes to your investment portfolio. The most obvious example of course is the tax advantage that comes with making your RRSP contribution each year, but non-registered investments should also be looked at closely. Not only should you be putting together a diversified portfolio, but also a portfolio which minimizes, as far as possible, the tax consequences on the resulting income.

Knowing your marginal tax rate – the amount of tax that is applied to each additional dollar of earned income – is an obvious place to start (see table). You then need to consider how tax is assessed on the various types of investment income available, since not all income is taxed in the same manner.

Although there are many different types of investment options available there are only three types of investment income: interest, dividends, and capital gains.

Interest income received from investments such as savings accounts, bonds, GICs and Money Market Funds is taxed at your marginal tax rate. As a rule of thumb, if you are taxed at the highest marginal tax rate you must earn at least $1.36 of interest income to receive the same amount of after-tax cash from $1.00 of Canadian dividend income.

Dividends received from taxable Canadian corporations through individual stocks and equity funds are taxed at a lower rate than interest income because of the dividend tax credit that is applied. (The corporation has already paid tax on the income that is being distributed to shareholders therefore the dividend is taxed at a lower rate in shareholders’ hands.) Dividends received from foreign corporations, however, are not eligible for this tax credit.

Capital Gains reflects the difference between what you paid for an asset and what you sold it for. Expenses incurred in purchasing or selling the asset further reduce the amount of the gain or loss. When you sell stocks and/or bonds, either directly or through mutual funds, the gain is considered a "capital gain" and only 75% of the gain is taxed at your marginal tax rate compared to 100% of interest income.

Because assets held inside of an RRSP are not subject to taxation until they are withdrawn from the plan, it is generally preferable from a tax standpoint to hold interest bearing investments inside an RRSP and dividend and capital gains producing investments in non-registered investments to take maximum advantage of the preferential tax treatments.

For a review of your account with a view to tax effectiveness, call the Mutual Fund Reporter Service Center at (416) 863-7777 or 1-800-387-9273.

Lowering Your Taxes with LSIFs

Many of our clients took advantage of the purchase of Labour Sponsored Investment Funds (LSIFs) and the 30% tax credit they offer. Purchasing the fund was the first step. Claiming your credits is the next step.

Instructions for claiming your 1998 Labour Sponsored Fund Tax Credit

If you purchased a Labour Sponsored fund before March 2, 1999, you will receive two tax forms from the fund company to file with your 1998 income taxes, to save yourself up to $1,500 in taxes. The federal labour sponsored funds tax credit is discussed on page 41 of the General Income Tax Guide.

Please note you will be required to submit Part 2 or 3 of the Federal tax credit certificate (T5006) as well as Part 1 of the Ontario tax credit certificate (OIEO) to file your tax return.

To claim your 1998 FEDERAL (T5006) labour sponsored venture capital tax credit:

• On line 413 of your T1 tax return, enter the cost of shares purchased on or before March 1, 1999.
• On line 414, enter the amount from line 413 x 15% (max $750).

To claim your 1998 ONTARIO (OIEO) tax credit you must use the TIC (ONT) TC 1998 Ontario Tax form:

• On line 19 of form TIC (ONT) TC of your T1 tax return, enter cost of shares purchased on or before March 1, 1999 x 15% (max $750).
• On line 22, enter the amount from line 19.

For samples of these tax forms, visit our website at: www.mutualfundreporter.com/investor_education/lsif/

This information has been compiled from information provided by the labour funds. ScotiaMcLeod does not provide tax or accounting advice. If you have further questions, please consult a tax expert.

Just ‘Park It’!

They coined the phrase, and you took advantage of it.

For those who were caught in the last minute RRSP contribution rush, your first priority was getting that contribution made. Your second priority is to get your contribution invested.

Now that the rush is over, remember to take advantage of the expertise of the Mutual Fund Reporter Service Centre. We will take the time to review your account thoroughly and ensure your contribution goes toward an investment most appropriate for your situation. In reviewing your account we will consider any changes or general housekeeping that should be made to existing investments as well. Ultimately we will strive to provide you with the strongest overall investment portfolio.

Remember, the sooner you get your money invested , the greater the impact on compounded returns. Call us today at (416) 863-7777 or 1-800-387-9273 for a complete review.