Your client, Kimberly has investments in both registered and non-registered plans. Which of the following investment strategies is best suited for Kimberly from a tax perspective?
A.
Include investments paying capital gains in the registered plan and foreign pay investments in the non-registered plan.
B.
Include domestic pay assets in the registered plan and foreign pay assets in the non-registered plan.
C.
Include interest paying investments in the registered plan and dividend paying investments in the non-registered plan.
D.
Include dividend paying investments in the registered plan and interest paying investments in the non-registered plan.
According to the Canadian Investment Funds Course, different types of investment income are taxed differently in Canada. Interest income is fully taxed at the marginal rate, while dividend income is favourably taxed with a dividend tax credit. Capital gains are taxed on 50% of the gain at the marginal rate, and foreign income is subject to withholding tax. Therefore, a tax-efficient strategy is to include interest paying investments, such as bonds or GICs, in the registered plan, where they can grow tax-deferred until withdrawal. Dividend paying investments, such as Canadian stocks or ETFs, should be included in the non-registered plan, where they can benefit from the lower tax rate and the dividend tax credit. Foreign income should also be avoided in the non-registered plan, unless it is held in a U.S. dollar account or a foreign currency hedged ETF, to reduce the impact of withholding tax and currency fluctuations.
References: 1: Canadian Investment Funds Course - IFSE Institute 2 (Unit 9: Retirement)
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