News Article

Evelyn Jacks: Statistically better investment returns

Posted: August 01, 2012

It isn't just the weather ó the record-high temperatures, the lack of rain, the surplus of rain ó that has made this summer chaotic. The economic environment has played its part, as well. Record-low interest rates, euro zone uncertainty and unusually volatile markets continue to take their toll on Canadians' accumulated wealth. Yet, since the 2008 start of the financial crisis, some Canadians have fared better than others ó those who have stayed true to their investment strategy and made the most of tax-efficient investing.

Consider these numbers from Statistics Canada. In 2010, the latest year for which statistics are available, the number of taxfilers reporting investment income (7.5 million) and the amount of investment income they reported ($50 billion) declined. (Investment income is the sum of dividend income from taxable Canadian corporations and interest income from investments in non-tax-sheltered vehicles.) But those with dividend income fared dramatically better than those with only interest income.

∑ The number of savers ó those who report interest income ó declined 15.3% to slightly less than 3.8million taxfilers. Total interest income reported decreased 24.2% to$6 billion.

∑ Investors, those who report both dividend income and interest income, held their ground, or even showed marginal gains. In this case, 3.7 million investors reported $44 billion in income. Although the number of investors declined by 0.3%, the total dividend and interest income reported increased 0.4%.

Clearly, in a low-interest rate environment, if you are counting on interest-bearing investments to provide the bulk of your future income, you're losing ground ó even before the eroding effects of inflation and taxes. Bring taxes into the mix and, again, investors make out better than savers. As the table below demonstrates, dividend income is subject to significantly lower marginal tax rates (MTR), providing an important hedge against inflation.

The source of your income, then, makes a difference in how much you keep ó and that's what tax-efficient investing is all about. As the table below shows, depending on the taxpayer's province of residence, a taxpayer in the middle-income tax bracket pays a MTR anywhere from 29.7% to 36.95% on "ordinary income,î that is, income from employment, pensions and interest. The lowest MTR, however, is on "eligible dividends,î those earned from investments in publicly traded companies and certain large private corporations.

The marginal tax rates that apply to various categories of income:
2012 taxable
income range
income (%)
small bus.
British Columbia
 Nova Scotia

                       42,708 to 74,028<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

42,708 to 85,414

42,708 to 85,414

42,708 to 67,000

42,708 to 68,719

42,708 to 59,180























Source: Knowledge Bureau's EverGreen Explanatory Notes

Indeed, the difference between the highest and lowest MTR is 30.49 percentage points. You would be further ahead, for example, to earn eligible dividends in British Columbia than interest in Nova Scotia.

It's Your Money. Your Life. Today, the negligible returns on money put into savings accounts are erased by taxes and inflation. Indeed, some will turn negative. Statistics suggest that those who have made even slight headway in building financial wealth have had investment portfolios that contained suitable exposure to equities. Particularly in these uncertain times, you need a strategic plan that will allow you to grow your wealth and manage your  risk. Tax and investment professionals can help with that planning as well as help mitigate behavioural responses that can reduce your long-term wealth accumulation.

Evelyn Jacks is president of Knowledge Bureau, best-selling author of close to 50 tax and wealth planning books and keynote speaker at the Distinguished Advisor Conference in Naples, Florida, Nov 11 to 14.