Tax-free interest income

The run-up in interest rates make interest income more appealing, of course. But only if you can shelter this income from income taxes. After all, unsheltered interest income is taxed at your marginal tax rate. There’s no tax credit on interest earned in unregistered accounts.

One plus is that the limit on annual contributions to your TFSA (Tax-Free Savings Account) is going up. In 2023, you’ll be allowed to contribute $6,500. That’s up from $6,000 this year. One problem some Canadians face is a lack of cash to contribute. Particularly if the costs of food, gasoline, housing, and daycare, among others, soaks up their income. Making direct deposits of $541.55 a month will maximize your contributions.

It’s also a good time to top up contributions to RESPs (Registered Educational Savings Plans). If your child or grandchild is only a few years away from pursuing post-secondary studies, fixed-income investments such as Guaranteed Investment Certificates are best. They guarantee that at least some of the money will be there regardless of what the stock market is doing.

Any interest earned in, and withdrawn from, the RESP is taxable in student’s hands. Most students earn little or no income, of course. So there’s little to pay. The tax credits are more valuable to those with higher incomes.

Own dividend stocks

Stocks we rate Very Conservative, such as AutoCanada and, can make good, core portfolio holdings. But you’ll do well to include dividend stocks like IGM Financial Inc. (TSX—IGM), Stantec Inc. (TSX—STN) and National Bank of Canada (TSX—NA) among your core holdings too.

That’s because many successful stock investors find that over the course of a decade or two, dividends supply a large component of their total return. It’s true that capital gains can supply more spectacular returns.

But they’re irregular, often disappearing or leaving capital losses as a stand-in just when you need them most. Dividends, however, are a reasonably steady source of income. Better still, they tend to ratchet upward over the years.

This is an edited version of an article that was originally published for subscribers in the November 25, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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