Asking your financial advisor about taxes
I am sorry to hear your advisor has not been helpful, Louise. The financial industry has made it confusing for consumers, and most financial advisors do not really provide financial advice. They typically provide investment advice or insurance advice, generally focused on the products they are licensed to advise clients on, or that their company sells. As a result, their advice may be limited.
Many advisors have tax knowledge, and in some cases, they are quite knowledgeable. The advisor managing your investments may not have the answers to tax questions.
Owning and selling investments in Canada
How investments are taxed depends, in part, on what type of account they’re held in.
Tax-sheltered accounts like tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) can have tax implications on the income earned too—so they may not be fully tax-sheltered. More on this below.
Non-tax-sheltered accounts require you to pay tax on the income earned. Your guaranteed investment certificate (GIC) could have tax payable on the interest income in a taxable non-registered account each year, Louise. GIC interest, even if it is compounded, must be accrued and reported for tax purposes at least annually. The same applies to stocks that pay dividends, or investments like mutual funds and exchange-traded funds (ETFs) that earn income from the underlying investments they hold.
When you sell an investment, tax only applies to taxable accounts. Capital gains or losses are irrelevant in a tax-free savings account (TFSA) and registered retirement savings plan (RRSP). But in a taxable account, selling an investment typically leads to a capital gain or loss, half of which is taxable (a capital gain) or tax-deductible against capital gains (a capital loss).
Although you can sell GICs, they are typically held to maturity. Selling a GIC does not result in a capital gain because the principal amount at purchase and sale or maturity is generally the same.
Let’s look at withdrawals from different account types in more detail.
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Withdrawals from taxable accounts
When you withdraw from a taxable account, the withdrawal itself is not taxable (unless it’s from a corporation, which is typically considered personal income, whether salary or a dividend).
Income earned in a taxable account—whether interest or dividends—or a profit from a sale that is taxable as a capital gain is the focus for taxes. The tax on this income applies whether the money is withdrawn or not. So, reinvested income is still taxable.
