Investments can deliver a major source of income and tax implications for individuals.  Each major type of investment income is subject to special tax treatment.

Understanding how your investments are taxed is an important consideration for investment planning since after-tax yield is more important than gross returns.  The most common types of income most investors will receive are interest, dividends, and capital gains.

Inside a registered account, like an RRSP or TFSA, these earnings are not taxed.  The total withdrawal from an RRSP is subject to income tax, while TFSA withdrawals are not. For investment income that is subject to tax when it is earned, the effective income tax rate can vary widely for an individual.

Interest Income

Interest income refers to the compensation an individual receives from making funds available to another party. Interest income is earned most commonly on fixed income securities, such as bonds and Guaranteed Income Certificates (GIC).  It is taxed at your marginal tax rate without any preferential tax treatment and is taxed annually whether or not it has been withdrawn from the investment.

Example:

An investor buys a 10-year GIC that has agreed to pay him 4% annually.  If the investor bought the GIC for $100, the contract stipulates that they will earn $4 of interest each year for the next 10 years.  The investor must report the $4 of interest income on their income tax return each of those 10 years.

Since interest income is reported as regular income, like employment income, it is the least favourable way to earn investment income if it is subject to income tax.  Typically, GICs offer relatively less risk than other investments to compensate for lower gross and after-tax returns.

Dividend Income

Dividend income is considered property income.  A dividend is generally a distribution of corporate profit that has been divided among the corporation’s shareholders.  The Canadian government gives preferential tax treatment to Canadian Controlled Public Corporations (CCPC) in the form of a dividend income gross up and Dividend Tax Credit (DTC).

Tax payers who receive eligible dividends are subject to a 38% dividend income gross up, which is then offset by a federal DTC worth 15.02% of the total grossed up amount.

Example:

 A shareholder of a Canadian Controlled Public Corporation is paid a dividend of $100.  This income is an eligible dividend and is subject to the gross up and the DTC.  The dividend would be grossed up 38%, so the income is now considered to be $138.   The DTC would be 15.02% of $138, the grossed-up amount, equaling $20.73.  Therefore, the shareholder would report a dividend income of $138, but would have their federal taxes reduced by $20.73. 

The rationale for the gross up and DTC is related to the fact that dividends are paid in after-tax corporate earnings.  If there were no adjustments to the dividend, it would result in the dollars being double taxed.   This tax treatment makes dividends a more tax efficient way to receive income than interest income. Tax is payable when the dividends are paid out.

Different rules apply for dividends derived from non-Canadian and private corporations and can offer different tax treatment and advantages when professional tax expertise is employed.

Capital Gains

Capital gains are realized on equity investments (such as stocks and mutual funds) that appreciate.  For example, if an investor bought a stock at $6 per share and sold at $10 per share, they would have earned a capital gain of $4.  In Canada, only 50% of a capital gain is subject to income tax.  In this example only $2 of the gain would be taxed.  Another desirable trait of capital gains income is that tax is not due until the investment is sold or deemed to have been sold.  This provides the investor with a measure of control over the timing of taxes.  Whether or not they are the most tax efficient income depends on your province of residence and subsequent tax rates.

It is important to ensure that investors understand their tax situation and the implications that different types of investment income can have on future taxes.

Financial, retirement and income planning should include the anticipated tax obligations at both the federal and provincial level.

Divorce is an emotionally draining time, not only for the couple but for their family as well. What should you be wary of? How can you be financially protected? What are you entitled to and where do you stand in the whole process? Hopefully, this article will help you clear your ideas.

Divorce is an emotionally draining time for not only the couple but for their family as well. It can also be a financially devastating time. Putting your energy into your financial wellbeing is essential when going through this life transition. You will be forced to make life changing decisions possibly in a very short period, and it is important that you know what you are entitled to and where you stand in the marriage, from a financial perspective.

1) Find and Compile Your Financial Records

Your first move to protect yourself financially is to make a file of all your financial records. Tax returns, loan and mortgage documents, retirement accounts, bank accounts, investment, and pension statements. You want to be sure that you are aware of all accounts and liabilities when you go into the divorce process. For those of you owning a business or whose partner owns a business, gather as much info as you can especially if you are a shareholder. For all real estate, secure the documents or copy them so you both have what you need.

2) Assess Your Assets

Make an exhaustive list of all your assets that could come into question when it comes to division of property. Marital assets are any asset or liability that was acquired during the marriage. This includes houses, cottages, land, investments, pensions, personal property (jewelry, art etc.), vehicles, and other types of intangible property (such as intellectual properties).

Typically, assets acquired before marriage remain in the possession of the person who brought them into the marriage. Inheritance and gifts can also be excluded from divorce if the assets have not been used to buy joint property. If you had a marriage or co-habitation agreement , now is the time to pull out and read every page.

3) Open New Bank Accounts

Many married couples have combined finances and use joint bank accounts for convenience’s sake. If you have or if you plan to end your marriage, one of your first steps should be to open new bank accounts in your name that your spouse does not have access to. You should also make it a priority to have any direct deposit is moved to your new account and start paying your bills out of your new individual account, more importantly your pay cheque, since it can be withdrawn in its entirety in the joint account.

4) Change Your Will and Update Beneficiaries

Most couples name each other as beneficiaries in their will and on any investment or insurance accounts where beneficiaries can be designated. This should be changed as soon as possible, unless you’ve decided to keep your former partner designated, which many people do especially in the early years of a separation. This may not seem like a top priority, but the unexpected happens and no matter how amicable the divorce, it is impossible to know your wishes will be honored upon your death, if you do not put it in writing. Investment accounts and life insurance policies can easily have their beneficiaries changed through your advisor. Something like real estate will also need your will and power of attorney designations should be updated by a lawyer to be updated in a will.

5) Change your Mailing Address

If you are changing your address due to the divorce, or even if you are splitting time in the family home until the divorce is settled, you should change your mailing address immediately. Whether this is to your new home or if you secure a PO Box, it is important that your mail stay private as you may receive correspondence from your lawyer or information about your finances.

6) Get Credit Cards in Your Name

If you have a joint credit card, pay them down and cancel them immediately if possible, so that you don’t find yourself responsible for debt that your spouse may accumulate when you leave the marriage.

If you own investments accounts either personally or corporately, now is the time to let the advisor know that there’s a marriage breakdown. Many investment accounts require only one signature, and most advisors will never do a redemption unless all parties sign, but they can only implement if they’re aware of your circumstances.

7) Refrain from Making Any Big Financial Decisions

Divorce can be a long road. Assets may become unavailable to you if you go through court proceedings, or conversely you could end up having to hand over more to your spouse than planned. It is wise to hold off making any big purchases or irreversible decisions until your separation agreement is in in place.

Separation and divorce are complicated and can be a difficult time, both emotionally and financially. It is always best to work with legal and financial professionals when navigating a divorce to ensure your best interests are being looked out for and that you are being treated fairly as the process proceeds. They can also help you to navigate the differences in the law, depending on whether you were married or common-law.

“This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.” 

Financial terminology is crystal clear for those folks who work in and are exposed to the financial industry on a regular basis, everyone else finds the definitions and implications difficult to understand. “Universal” and “Whole Life” life insurance is not exempt from this reality.

Whole Life and Universal Life

Whole Life

Whole Life Insurance is also called ‘permanent’ as it provides a lifetime of coverage. As long as the premiums are paid, the insurance stays in-place permanently. With the Whole Life policy, the death benefit and premiums are usually guaranteed and remain fixed.

Whole life policies pay the death benefit when the insured person passes away.  They can also accumulate additional cash value inside of the policy. The invested premiums fund the death benefit, and whenever excess premiums occur, they are then invested by the insurance company on your behalf and create a Cash Value.

Typically, Whole Life insurance is the ideal option for those people who desire level premiums and a predetermined death benefit.

Universal Life

Universal Life Insurance is a slightly more complicated financial solution, as it is considered both a Whole Life policy and a tax-preferred savings account combined together. At the beginning, the death benefit is set and then any premium payments above what the life insurance policy requires can be used to increase the death benefit or be held in a tax-preferred savings account.

This last point is important for those people who may have maximized their RRSP & TFSA contributions and are looking for additional legal ways to shelter income and wealth from taxation.

To understand the differences between Whole Life and Universal Life Insurances be sure to consult with Us, especially if you have significant wealth to transfer to your heirs or you own a business.

Global investors may have a larger influence on climate change than we thought according to new research.  The study shows that publicly listed companies worldwide account for 40% of all climate-warming emissions, putting shareholders of those firms in a strong position to drive a greener agenda.

The first-of-its-kind analysis of over 10,000 companies by UK-based Generation Investment Management shows that previous studies have underplayed the size of the part that listed companies play in creating emissions.

Miguel Nogales, co-Chief Investment Officer of Generation Investment Management, says that listed companies are hiding in plain sight when it comes to the climate crisis.  He added that the investment community’s influence and leverage have been underestimated.

“As COP26 approaches, our research highlights the importance of capital allocation choices and meaningful portfolio engagement if we are to be successful in delivering a net-zero world by 2050,” he said.

Nogales noted that there is a lot more listed firms must do to address their impact on climate change.

“Given their outsized resources and focus on developed markets, listed companies will need to deliver the lion’s share of private-sector emissions reductions in the next few years,” he said. “If the world needs to get to net-zero by 2050, the ambition for public companies overall should be 2040 at the latest – and they must focus on decarbonization in the near term.”

New methodology

The new research differs from previous studies in that it includes listed companies’ value chain GHG emissions.  For example, oil produced by listed global oil majors that are consumed by households and smaller non-listed enterprises, as well as the oil consumed in vehicles manufactured by listed companies.

The issue of double-counting has been incorporated into the methodology.

Felix Preston, director of sustainability insights at Generation Investment Management, said that investor action on climate change is rightly targeted on the highest emitting and systemically important companies, but other listed firms also have a key role to play.

“With the right incentives, these companies can attack emissions reduction from all angles and unleash the untold potential for innovation and collaboration. Indeed, this could be an important weapon in driving change in incumbent heavy industries, which are some of the largest Scope 1 emitters,” he said. “Many listed companies in this long tail are more nimble and far less wedded to high-carbon business models and can play an important role in driving progress.”

Talk with your advisor if this is a concern of yours.  There are many options to better balance your portfolio that they can walk you through.