The blessed

Investors are blessed. The Creator wants you to invest. Even the CRA’s on board.

There are five gifts worth celebrating. First, those bold enough to invest with borrowed funds may deduct the interest they pay from taxable income. This takes the sting from the rising cost of money when a third or even half of the cost can be recouped. You can’t do that with your mortgage, car loan, credit cards or the HELOC you borrowed against to fly south on vacation and get food poisoning.

Second, capital gains taxes are a treat. Way better than working. For example, if you earn a hundred grand from employment and have an equal amount in realized capital gains, the tax on the work money is about 25% while the investment profit which rolled in is taxed at just over 12%. Capital gains taxes are among the lowest that we little beavs pay because 50% is tax-exempt and the remainer is scooped at one’s marginal rate.

(But, beware. Forces of evil, like the NDP, want the taxless portion seriously reduced, while other bad actors are lobbying for a 100% inclusion rate on investment gains. For now, it’s not happening).

Third, divvies rock. Lots of stocks and ETFs have regular dividend distributions, and tax rules allow you to keep more than cash received as, say, a bonus at work. The dividend tax credit is the reason. For example, if you live on dividends only (no other source of income), federal taxes don’t start until you earn more than $65,000. How cool is that? There is a small amount (about $1,500) of alternative minimum tax payable at that point, but the saving is still substantial.

Fourth, even if you lose your mind, become a reckless cowboy and buy some stocks that turn out to be complete pooches, the tax system is there to support you in Canada. In fact, 2022 could be a great year to dump some of those dogs, turning your paper losses into real ones.

This is a good idea for two reasons. First, you will feel bad, horrible, failed, defeated and worthless, which is a learning experience. Never do that again. Second, the loss triggered can be used to reduce taxes on gains made on other investments, in past years, or even in the future. Tax-loss selling yields a ‘capital loss’, in other words, which can obliterate a ‘capital gain.’

The rule is simple and generous. When you sell an asset and take a hit, that loss can be applied against taxes paid on any capital gain within the last three years. That’s a gift. Refund! It makes losing money way easier. Even better is the fact a capital loss can be carried forward into 2023 or beyond (indefinitely) and used in the same fashion. This is why in a crappy year for investing (like this one) you may be better off to punt the dogs, crystallize the losses and put them to use against winners sold next year.

One rule to remember: you’re not allowed to sell an asset to trigger a tax-reducing loss, then immediately buy the security back. That’s called a ‘superficial loss’ and you’ll be whacked for doing so. Wait 30 days. Also none of this applies to registered accounts, like RRSPs and TFSAs where no gains are taxed and no losses may be claimed.

Worth remembering also is that maple assets have done better than American ones this year, while the greenback has soared against all major currencies, including ours. So selling a $US-denominated security at a loss will translate into a bigger deduction once converted into Canadian pesos.

Fifth (and lastly for today, because I can’t take any more euphoria) is the way the tax system helps take the sting out of uber-taxed high incomes. The 2022 RRSP contribution limit is now over $29,000. Not only will this money grow over time completely free of taxation, but you can deduct the entire contribution from taxable income.

But wait. There’s more. Contributions should be made annually into your RRSP for growth, but you can save them up for tax purposes. In other words, the deduction can be carried forward to future years when income may be higher and the tax saving therefore greater. Or use them to reduce the tax payable on the cash portion of a commuted company pension when you retire.

Above all, the Creator wishes me to impart this: it’s not what you make. It’s what you keep.

Amen to that.

About the picture: “This is our grand-dog Chelada,” writes Roger. “She is a 9 1/2 year old British Bulldog. She is presently recovering from 2 leg operations ( hence the wrapping on her back foot). Here’s hoping Chelada’s main human ( our daughter) will see the photo and maybe take the time to read  your words of wisdom.”