What are the tax considerations when investing?

It all depends on the type of account you are investing in. Investment gains and dividends within a TFSA are tax-free – Hooray! This is one reason to prioritize TFSA investing!

Investment gains and dividends within an RRSP (and other tax-deferred plans) are taxed  at your marginal tax rate at the time of withdrawal. Do note that there are penalties for withdrawing RRSP funds before your retirement – so don’t plan on touching this money until you are ready to retire (except in certain circumstances like the First Time Home Buyers Plan, and Lifelong Learning Plan). 

Personal (taxable) accounts will be taxed each year you file taxes and report any capital gains or dividend income. 

Investing in your RRSP has tax benefits, and can reduce your taxable income. So if you have a higher income level (70K+) you may want to prioritize RRSP first to minimize your taxable income. Always check with your financial planner to determine the right strategy for you.

Taxes on investments come in two forms:

1. Taxes on realized capital gains (securities you actually sold and made a profit on).  50% of your capital gains (the amount of profit you made) are added to your taxable income for the year.

2. Taxes on Dividend Income (how much dividend income you made from your investments).  I will let the experts over at TurboTax explain this one for you. 

Just so you aren’t shocked later on, yes, Crypto accounts also have tax implications, and you must report your investments on your tax return. 

What is my risk tolerance?

Out of the 6 things you must consider before investing, this is one of the most important. Investing carries risk. Period. Anyone who tells you otherwise is lying. The key is to understand yourself well enough to know what level of risk you are capable of tolerating. Knowing this will determine what kinds of investments you should consider choosing. 

The riskier the investment, the higher the potential return, and the higher the potential loss.  The potential for higher return is the reward an investor receives for stomaching more risk.  Imagine this scenario: You put $5,000 into an investment, and the next month it loses 20% of its value. How would you react? 

People with a lower risk tolerance may have a knee-jerk reaction and want to pull out their investments in order to not lose anything further. Investors with a higher risk tolerance may react differently, and hold their investments even in a down market, as they will feel more comfortable with their investment plan since they are hoping it will rebound and gain value in the long run. 

Risk and Mental Health

Seeing our investment value decline can have a real impact on our mental health and stress levels. That’s why you need to pick an investment at the appropriate risk level for you. 

Please do not follow trends, influencers, or news personalities who are encouraging you to get in on a hot stock without doing some serious research. Their risk tolerance could be much higher than yours, They could be compensated for the promotion unbeknownst to you, and following their advice could end up putting you in a difficult situation if that hot tip turns cold. Understanding how much risk you are comfortable with and choosing the right investments will make the whole experience much easier to manage.

Get Started!

I hope these 6 things you must consider before investing have helped you focus your questions and get ready to take action. If you are not sure how to pick the right investment risk level,  you can start investing with a robo advisor so they can create a portfolio for you based on your personal risk tolerance, goals and investment time horizon.

You can find out which are the best brokerages for beginners on our blog, and even get sign-up bonuses when you open accounts. 

check the Finance and Investing section of the blog or return to www.canadianbudget.ca