When investing outside of the tax-sheltered environment of an RRSP or RRIF, it is important to consider an investment’s after tax rate of return in conjunction with your risk tolerance and investment goals.
To reduce the tax paid on your investment income, you should consider investments that generate capital gains or Canadian source dividends as they are taxed more favourably than interest income.
Interest income earned from investments such as T-Bills, bonds, and GICs are generally taxed at the highest marginal tax rate. Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income. This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders. This however only applies to dividends from a Canadian corporation. Dividends paid from a foreign corporation are not eligible for the dividend tax credit.