Investment Performance
The significance of taxation
The true test of an investment is its’ after tax performance. Different investments have different tax costs. In Canada, at a top tax rate of 50% (which will vary slightly province to province), interest is taxed at 50%, dividends at 33% and Capital Gains at 37.5%.
The typical investor will have a diversified mix of investments (stocks, bonds, GICs, mutual funds) and each investor will have their own individual average investment tax cost, usually around 40%.
In the case of a Mutual Fund, when a Fund Manager sells stock internally, or an investor switches from one fund to another, a disposition occurs. Tax must be paid on any gains, which lessens the overall growth.
The same is true for a G.I.C. A G.I.C. at 5% and 40% tax would net 3%. If inflation is running at even 1%, the overall Real Return could be as low as 2%!!
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Last modified: September 07, 2011