Canadians unclear about taxes on investments

That the majority of investors don’t understand the tax consequences of their investments is unsurprising to John Waters, vice president, head of tax and estate planning, wealth planning group, BMO Nesbitt Burns, given that the rules around those taxes often change, such as when the capital gains inclusion rates were altered around 2000.

“I can understand the confusion because, unless you’re sort of in my world where you’re following these tax changes as they come out,” says Waters, “there’s been a lot of changes over the years.”

Advisors can educate their clients about how these taxes work and what they mean for their investments through articles which give a breakdown of different taxes, says Waters, or, even more importantly, by showing clients examples of the impact of these taxes.

For example, in a meeting with clients, advisors can do a comparison of the three different types of investment income: capital gains; dividends and interest, says Waters. In that scenario, the advisor can show clients the different tax consequences of earning 5% in interest, a 5% dividend yield or 5% capital gain.

“[Take] the time and sort of walk through some of these example scenarios,” he says, “or try to explain how the different types of investment incomes are taxed.”

As well, while taxes are only one part of a client’s decision to invest in a certain product or company, says Waters, any discussions around an investments tax consequences need to happen sooner rather than later.

“Arguably the best time to look at [investment-related taxes] is at the time of your purchase,” he says. “Because then you go into it with your eyes wide open.”