Not all investments are created equal. Some investments promise rates of return by the issuer (of the debt) and some have the promise of potential lofty returns (equities or stocks) but neither are they treated the same way by Canada Revenue Agency (CRA). Marginal tax rates in Ontario dictate that income, dividends and capital gains be treated differently, from a tax perspective. Income, like your salary is at your highest marginal tax rate and dividends and capital gains are taxed less. Capital gains applies to properties that are bought and then sold for a profit, such as real estate, stocks and even sometimes, bonds. Primary residences are excluded from capital gains tax but secondary residences and investment properties are not. Dividends are payable quarterly by larger corporations if you hold their stock on the dividend date.
In order to effectively utilize a tax strategy I put all my clients fixed income (bonds, coupons, bond funds) in their registered plans as much as possible. Why? Because any income generated in a registered plan, such as a registered pension plan or a registered retirement savings plan shelters any income from tax. Therefore, by placing the highest taxable investments inside the RRSP's where the income is not subject to tax, for example, the client gets to keep more of what she or he earned. By placing the growth investments that generate capital gains and dividends in their non-registered investments clients enjoy paying at a lower tax rate.
So if you live in Ontario your combined federal and provincial tax rates have you paying 31.15% on any interest income received (that's $0.31 on every dollar that you earn), 15.58% on capital gains and 9.76% on dividends. So why not shelter your interest income as much as possible?
(Of course, your asset allocation and geographical allocation should not be compromised when adhering to a tax strategy but it should be considered in the appropriate fashion.)
For your marginal tax rate, here is a link:
Marginal Tax Rates in Ontario
