1. Mutual funds

It is essential to know mutual funds held outside a registered retirement savings plan (RRSP) are taxed differently from those held within an RRSP.

  • Outside an RRSP: Earnings from a mutual fund that is not part of a registered retirement plan will be subject to tax, even if reinvested. Mutual fund earnings can be taxed as interest income, dividend income or capital gains, depending on the underlying investment. Also, while withdrawals from a non-registered mutual fund are not taxed, they may trigger a capital gain or loss. To avoid surprises, ask your financial advisor before making a withdrawal.
  • Inside an RRSP: Earnings from RRSP mutual funds are exempt from tax until you withdraw money from the fund. All money you withdraw from an RRSP mutual fund is taxed as income.

2. Bonds

Bonds are attractive because they pay a set amount of interest (most often twice annually) and usually give us back our money when they mature. But be aware their price can fluctuate and they can default, leaving you with no interest income and the loss of all or part of the money you invested.

When calculating your taxes, you must add all bond interest to your taxable income for the year. If you sell your bonds at a profit, you incur a capital gain and must add 50% of that gain to your taxable income. Alternately, if you sell at a loss, you can use that loss to offset your capital gains in the given tax year, or carry it back three years, or carry it into future years.

3. Stocks

We invest in the stock of a company for the dividends and the hope that the stock price will rise. When you sell stock at a profit, you must pay tax on capital gains. If you sell at a loss, you can use that loss to offset capital gains in the given tax year, or carry it back three years, or carry it into future years. Dividends receive preferential tax treatment and are taxed according to a formula based on your income and the province in which you live.

4. RRSP investments

You must convert all of your registered retirement savings plans into income by the end of the calendar year in which you celebrate your 71st birthday. Also, you may no longer contribute to a registered retirement plan or company pension plan after that date.

By December 31 of the year you turn 71 you can do any of the following with your RRSP savings:

  • Cash in your savings. If you take this option, you will be taxed on the full amount, something you most definitely want to avoid.
  • Convert your savings to a RRIF.
  • Buy an annuity.

5. Registered retirement income funds (RRIF)

The flexibility of RRIFs is a key benefit. RRIFs let you choose how your money is invested. Options include guaranteed investment certificates (GICs), accumulation annuities, mutual funds, segregated funds and some higher risk options. You may even be able to move your current investments into a RRIF.

With a RRIF you must withdraw a minimum amount each year. You are not taxed on income earned in your RRIF, but you are taxed on all money you withdraw from it.

6. Payout annuities

Earnings from registered annuities are tax-deferred and you pay tax at your taxable rate only on the payment you receive each year. You select your payment schedule when you purchase the annuity. In certain circumstances, non-registered payout annuities offer preferential tax treatment (prescribed tax).

7. Tax-Free Savings Accounts (TFSAs)

TSFAs allow you to contribute up to $5,500 ($5,000 for each year from 2009 to 2012) of after-tax money annually, make tax-free withdrawals and carry forward unused contribution room. They also let you replace your withdrawals without penalty in the next tax year when your contribution room is increased by the amount of withdrawals. Your contributions are not tax-deductible but you pay no tax on earnings in your TFSA account.

All these investments are multi-faceted and the taxes that apply to them are somewhat complex. Your financial advisor is trained to help you understand which investments are best for you and the taxes that apply to them.