Achieving tax efficiency within an investment portfolio is not just a strategy for people who need cash flow today. If your investment plan includes long-term goals, like a comfortable retirement, minimizing the amount of taxes you pay on your investments can have a tremendous impact on your portfolio over time.
That is why building an effectively diversified portfolio — one that includes the appropriate mix of cash, fixed income and equities according to your investment objectives — is key to building wealth and accelerating growth over time.
The types of investments you own and whether you hold them inside of or outside of registered plans RRSPs and TFSAs can have a bearing on the tax efficiency of your overall portfolio and, ultimately, on your ability to achieve your financial goals. The following table provides a brief description of some of the different types of distributions that investors may receive from mutual funds and how each type is taxed.
Here are descriptions of the different types of distributions you may receive from a mutual fund and how they are taxed. You can stay on track to meet your long-term goals by building a tax-efficient investment portfolio with your advisor. Alternative investments Alternative investments list About alternative investments. Tax efficiency is a key consideration in maximizing investment returns after taxes. Income from your investments can come in various forms, the most common of which include interest, dividends and capital gains.
The ACB, when deducted from the proceeds of disposition, determines the amount of a capital gain or capital loss when the shareholder disposes of the shares. The stated capital and PUC only capture a shareholder's contribution to the corporation for a share; the ACB captures a shareholder's contribution to any vendor for a share.
The corporation gets nothing out of this transaction. Subsection 84 1 deems a corporation to have paid a dividend on a class of shares for which the corporation has increased PUC.
In turn, paragraph 53 1 b increases the shareholder's share ACB by the amount of the deemed dividend. The ACB bump ensures that the shareholder isn't double taxed when selling the affected shares. But subsection 84 1 doesn't apply and no deemed dividend will arise if the increase in PUC resulted from any of the following:.
The corporation didn't decrease the PUC of any other share class. When a corporation is wound up or liquidated, its assets are sold, liabilities paid, and the remaining cash is distributed to the shareholders thus canceling their shares. Under subsection 84 2 , upon the corporation's liquidation or winding up, any property or cash distributed to a shareholder in excess of a share's PUC is deemed a dividend.
But when computing the capital gain for disposing the shares, the shareholder reduces the liquidation proceeds by the amount of the deemed dividend. This ensures that the shareholder's liquidation proceeds aren't double taxed as both deemed dividends and capital gains. The deemed-dividend rule in subsection 84 2 doesn't apply if: 1 subsection 84 1 applies to the same transaction; or 2 the corporation's share purchase for cancellation was an open-market transaction.
A share redemption occurs when a corporation purchases its shares from a shareholder and cancels those shares. Subsection 84 3 deems the shareholder to have received a dividend to the extent that the redemption proceeds exceeded the share's PUC. But when computing the capital gain for disposing the shares, the shareholder offsets the redemption proceeds by the amount of the deemed dividend.
This ensures that the shareholder's redemption proceeds aren't double taxed as both deemed dividends and capital gains. The deemed-dividend rule in subsection 84 3 doesn't apply if: 1 subsection 84 1 applies to the transaction; 2 the corporation's share purchase for cancellation was an open-market transaction; or 3 the redeeming corporation was a public corporation.
Subsection 84 4 applies where a Canadian resident corporation reduced its PUC for any class of shares. Generally, a corporation reduces its PUC when it pays a tax-free return of capital to its shareholders. Subsection 84 4 anticipates situations where the corporation pays an amount exceeding the appropriate corresponding decrease in PUC. Basically, the provision says that, to the extent that the payment exceeds the amount of the PUC reduction, it is deemed a dividend.
Moreover, subparagraph 53 2 a ii accounts for the tax-free return of capital by reducing the ACB of the shareholder's shares. So, subsection 84 4 permits a private corporation to distribute a tax-free return of capital so long as the distribution corresponds with the PUC reduction.
But public corporations can only distribute a tax-free return of capital in limited circumstances. Subsection 84 4. The general rule deems as a dividend any payment by a public corporation to its shareholders even if the payment doesn't exceed the reduction of PUC.
In other words, public corporations generally can't pay a tax-free return of capital to their shareholders. The public corporation may, however, pay a tax-free return of capital to its shareholders only if the amount came from proceeds that the corporation realized from a transaction "outside the ordinary course of the business of the corporation.
The corporation's stated capital need not accord with PUC. This inconsistency is a common trap for those relying solely on the corporation's financial statements.
Unaware that share capital exceeds PUC and issuing what appears to be a tax-free return of capital, inexperienced accountants and corporate lawyers often trigger deemed dividends for their clients. Consult one of our experienced Canadian tax lawyers to review pending transactions or for advice on reducing the risk of a deemed dividend. For instance, one simple strategy is to reduce the corporation's stated capital so that it matches the PUC. If you have already triggered a deemed dividend but failed to report the income on your return, speak with our Canadian tax lawyers about your options.
For instance, you may qualify for relief under the Voluntary Disclosures Program , a rectification order, or a late-filed capital-dividend election.
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If an investor receives an amount that is less than or equal to the cost basis, the payment is a return of capital and not a capital gain.
A partnership is defined as a business in which two or more people contribute assets and operate an entity to share in the profits. The parties create a partnership using a partnership agreement. Calculating the return of capital for a partnership can be difficult.
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