Ins and outs of interest income tax hit

Could you tell me how interest income is taxed? My adviser wants me to switch my portfolio, but I am reluctant to do so. Thanks, Melanie

Great question, Melanie. Many Canadians don’t want to risk their retirement portfolios to the uncertainty of the stock market and instead put their money into interest savings structures like GICS to reduce risk and maintain their capital. Others, especially those who have financial planners to guide them, put their money into dividend-producing guided stock portfolios.

So, which is better? Is your adviser right to suggest something different? Let’s compare the two options and you decide.

Dividend income gets preferential tax treatment in the form of a dividend tax credit. Interest income is taxed the same as ordinary income, at your marginal tax rate based on where you live in Canada.

It is necessary to figure out the correct multiplier to calculate the additional amount of interest income you would have to earn to then equate this after-tax interest income to the amount of after-tax income retained from an eligible dividend.

Let’s take Nova Scotia. Eligible dividends are taxed at an effective top marginal rate of 41.58 per cent and interest is taxed at the top rate of 54 per cent. Therefore, a Nova Scotia investor would have to earn approximately $1.27 more in interest income for every $1 of eligible dividend income in the same after-tax position.

You know I am going to

recommend you chose the dividend income strategy; that being said, I also know a lot of older Canadians are worried about the markets and some have little to no tolerance for market swings. Why not consider talking to your financial planner about a blue-chip dividend portfolio? It doesn’t hurt to look at other options to make money wisely. No one wants to pay more taxes than they have to.

Good luck and best wishes, Money Lady

123R Consider your investment portfolio and interest income dividends, says Christine Ibbotson.