Weekend Reading – Taxation of Income

Weekend Reading – Taxation of Income

Hi There!

Welcome to a new Weekend Reading edition, chatting this week about the taxation of income in Canada.

First up, some reminders and recent reads:

I answered a few new reader questions in this post including one about my projected annual dividend income (PADI) updates:

Reader Questions – Saving and Investing Updates

I updated this post with insurance broker Brian So, related to workplace benefits and what to do when those disappear with any retirement decision.

Weekend Reading – Taxation of Income

Tax tips every Canadian should know

Source: Pexels

Inspired by a healthy, recent exchange with a DIY investor friend on X (formerly Twitter), I thought I would highlight how different income is taxed in Canada and how that may (or may not) impact how you might invest – including in any taxable account.

First up, a primer.

Our Canada Revenue Agency (CRA) lists a LONG list of income sources you and I are taxed on…so I won’t repeat them since that’s a blogpost and then some unto itself. 🙂  A quick Google search will show you that. 

Source: Types of personal income.

So….most income is taxable but not all income is taxable. Taxable income includes but is not limited to:

  • Employment income: i.e., the money you earn from a job.
  • Self-employment income: i.e., the money you earn (or with a business partner) providing a service or selling goods.
  • Interest: income earned on savings in a bank account, including any money earned listed on a T5 slip.
  • Investments: income earned from selling stocks, bonds, or an investment property beyond your primary home.
  • Pension income: e.g., income you receive from from our Canadian Pension Plan (CPP) or Québec Pension Plan (QPP). 
  • RRSP/RRIF withdrawals: when money is withdrawn.

And so on…

Luckily, the government doesn’t tax every dollar that lands in your pocket the same. Not only do we have a progress tax system in Canada but some income is tax-exempt, meaning you don’t have to declare it on your income tax return at all which includes:

  • Most small gifts: there is no need to declare birthday cash and/or graduation gifts as money.
  • Canada child benefit and/or GST/HST credit: this is purposely designed to help offset living costs for Canadians, the government doesn’t ask for a percentage of these payments back at your taxable rate.
  • TFSA withdrawals: again, the name of the account is a “Tax-Free Savings Account” but you can put investments there too!

And others…

The reason I hit on this subject this week is because based on my X exchange with my friend, it seems some savers or investors might be mislead about income earned, including dividend income earned, especially in a taxable account. Here is a very quick summary about the tax treatment by income type:

Weekend Reading - Taxation of Income

Source: https://www.rbcgam.com/

I wrote about the tax treatment of Canadian dividend paying stocks in particular already and a key takeaway from that post is “it depends” what your investing goals are, what tax burden you wish to tolerate, when it comes to your investing approach.

I know folks that use higher interest savings accounts for savings, despite being fully taxable income. 

I know folks that invest in Canadian dividend paying stocks, knowing those dividends as fun as they seem are taxable too.

I know folks that invest in assets that deliver ROC in the table above, so yes, there are tax implications for that too.

And yes, some folks just focus on capital gains. Real estate beyond your primary home is a good one there however with a stroke of a government pen, now they face higher taxation (re: capital gains). 

All good in my book…honest. Everyone usually has different objectives. That means for me higher taxation paid is unnecesary unless it is aligned to your goals.

Can you imagine passing up a significantly higher-paying job for your family just because of higher taxation?

What about avoiding growing your business because you didn’t want to pay more tax? 

I’m of the mindset that while lots of taxation is not great (of course) higher taxation is usually “a good problem to have”. It means you are making money. Higher taxation should not trump your primary income objectives. Get the big decisions right: saving, investing, killing debt, etc. That’s 80% personal finance 101 in just a few words. Life your life including taxation from there…

I know many DIY investors that are doing very well with a dividend approach. I know others that are doing equally well with a capital gains approach via stocks, real estate, other. I know others still that invest in a mix of things and based on their income or investing success, to be perfectly honest, they get bored of these debates because their financial goals are being continually met and they simply don’t care what others do. 🙂

2023 Financial Goals - May Update

Source: Behavior Gap.

I have no doubt dividends vs. capital gains vs. indexing vs. saving vs. debt management vs. related debates will rage on. All good. Keep the fun coming. Happy to discuss anytime here including any different opinions. Like some other decisions in life: you simply need to find what works for you. 

For now, should you wish to tinker with tax, here are some interesting tax calculators (free of course) to toy with to see what could work for you:

https://www.fidelity.ca/en/taxcalculator/

https://wowa.ca/calculators/income-tax

Taxtips.ca has some amazing free calculators here.

Weekend Reading – beyond taxation of income

Related to this week’s theme, in The Globe and Mail:

“You’re no longer middle-class if you own a cottage or investment property” (subscription)

From that article:

“Paying taxes on a half-million-dollar capital gain from a cottage or an investment property is a good problem to have. I could line up millions of younger Canadians who would jump at the opportunity to trade their housing woes for that privilege.”

From the oldie but goodie file:

Can you have too much income from dividends?

In dividend news we received dividend raises from the following companies recently, although that won’t impact us fully tax-wise given where we hold these stocks:

  • Telus (T)
  • Pembina Pipeline (PPL)
  • Sun Life (SLF)

Ticked off about taxation? Potentially move to a lower-cost of living country for retirement. Stocktrades.ca has a few ideas when it comes to the best places in Canada or beyond Canada to retire. 

Working vs. your portfolio working? Thoughts?

I enjoyed this take on Jon Chevreau’s site about retirement fears. I certainly have some myself. 

“However, living life through the eyes of fear only amplifies that uncertainty. If you wait for that perfect time to do something, you may discover that it never arrives. Looking back over your life, you might see all of the missed opportunities for great adventures and memory-making that you set aside in your pursuit of that ever-elusive feeling of security. What if it all works out?”

Warren Buffett has no retirement fears – he’s still working! Dale Roberts wrote about Warren and Berkshire recently here.

Dividend Daddy is now earning close to $80,000 per year from his portfolio. With a paid off primary home, and soon to be paid off vacation property in Mexico as well, he’s starting to enjoy what he has worked so hard for – see pics in this post. Incredible progress…kudos!

Congrats to my friend GenY Money on her portfolio income goal too!

“This month I crossed the $35,000 threshold, that was my 2023 personal finance goal that I didn’t hit.”

The folks at Morningstar said while the fund industry is not perfect it is getting better with time

Bold social media enthusiast Jim Chong shared a reminder about “corporate” even though I don’t agree with everything in this take… What about you?

 Dividend Growth Investor shared one of his favourite retirement stories about Ronald Read.

“The dividend investor to profile today is Ronald Read, who left an $8 million fortune behind when he passed away in 2015. What’s fascinating about him is that he never earned a high income, because he worked as a gas station worker or a janitor.”
Have a great weekend!
Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

4 Responses to "Weekend Reading – Taxation of Income"

  1. When I came off of being a SAHM I went back and snatched up some casual contracts with the federal government. I basically worked the 90 days in one year (Sept+) and then 90 days the following year (Jan+) at the same place & then I took summers off to be with my kids because most of those employment holes were filled with summer students (May+). Rinse, repeat. I also took some private WFH contracts periodically in the summer.

    This way, I managed to double my salary in 4 years in a way that I wouldn’t have been able to had I been an Indeterminate employee with the Feds. Internally, they really frown on people jumping more than two job bands and I have even seen people who went back to get an MA/MBA still subject to those climbing rules. Of course, there are MANY advantages to being Indeterminate, I was grateful to have entered the government at a much higher salary than I would have been able to had I got hired directly from my first casual. The only downside is that I bought back my pension years at the highest rate. Still, I don’t regret it. I managed to do more and more interesting work while maintaining a balance with the summers off. Leaving jobs is definitely the way to go in many cases unless you are very happy to be in your current environment or are in a specialized field where they are desperate for staff and need to incentivize their current workforce into not leaving.

    Reply
    1. Congrats, Post, on the WFH contracts. Good stuff.

      If you enjoy “…more and more interesting work while maintaining a balance with the summers off…” then awesome.

      At the end of the day, folks need to be happy and well – whatever that means in terms of higher income or not.

      Take care.

      Reply
      1. If it wasn’t clear, my comment was in agreement with Jim Chuong’s tweet you posted above about changing jobs to get better wages. That is how I achieved a better wage. Cheers.

        Reply
        1. Hi Post, yes, I understood… re: At the end of the day, folks need to be happy and well – whatever that means in terms of higher income or not.

          Some folks don’t continually need higher income to be happy…others need it for various spending reasons.

          All good!
          Mark

          Reply

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