No matter how you save money, you are going to deal with one of three basic scenarios, which have different tax consequences.

Christopher Dewdney, a certified financial planner and founder at Dewdney & Co., explains.

Capital gains

Capital gains are the most tax efficient, Dewdney says. You are taxed at 50% of your gains. Capital gains are the amount that an investment has grown when you sell it. Because these get the best treatment from a tax perspective, he recommends choosing to hold these in a non-registered account.

Examples: Stocks in individual companies, equities funds that hold many companies’ stocks, real estate.

READ: Tax Time: Four Questions to Help You Decide Between RRSPs and TFSAs


These are the second-most tax efficient, Dewdney says, but the calculation is a bit complicated and depends on your income tax rate and the type of dividend. Dividends are a percentage of profits a company pays to shareholders who own stock in the company. These types of investments would be appropriate for a tax-free savings account (TFSA), he says.

Examples: Stocks in companies that pay out dividends, dividend funds.

Interest-bearing securities

Interest-bearing securities are the least tax efficient, Dewdney says, as they are considered a part of your income for the year and you are fully taxed on them. But your portfolio should have some because they protect against market fluctuations, he adds. So when the market goes down, these don’t. Because these are the least tax-efficient, hold these in a tax-sheltered registered account, such as a Registered Retirement Savings Plan (RRSP), Dewdney says.

Examples: High-interest savings account, rental income, Guaranteed Income Certificates (GICs), bonds, fixed-income or bond funds.

READ: Tax Time: Should You Contribute to an RRSP or Pay Down Your Mortgage?


Dewdney gives an example of someone earning $100,000:

If you have $10,000 to put aside, if you put it all into a product that gives you, say, 1% interest, you will be taxed on $110,000 as your income, because interest is counted as 100% taxable. If you put the $10,000 into a product that grows at, say 5% (a reasonable expectation of stock growth in this market), you will be taxed on $105,000. If you put the $10,000 into a dividend-yielding product, the calculation becomes more complicated (a percentage of the grossed up value of your dividend income), but Dewdney says it would be better from a tax perspective than interest earnings, but less tax efficient than capital gains.

Personal Finance