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"A Family Tradition for 128 Years" PORT PERRY STAR - Tuesday, February 8,1994 - 15 Income or capital gains! What's right for you? Which would you rather have: a goose that lays golden eggs; or a golden statue of a gan- der that grows daily? That's roughly similar to the question you face when you try to decide whether to invest for income or capital gains. But, unlike the situation with geese, personal and external economic consid- erations, as well as the effect of taxes, will influence the relative advantages of these strategies. Investing for income means putting your money in things that either pay interest, such as bonds, GICs, and Treasury Bills, orininvestments that pay dividends, including preferred shares and some common shares. Aiming for capital gains or growth means investing in assets that will be worth more when you sell them down the line. These investments include common shares, convertible preferred shares and converti- ble debentures, precious met- als, options and commodities, real estate, and others. On the simplest level, you may wish to invest so you can immediately spend the money your investment earns for you. In this case, investing for in- come makes sense, since you won't have to sell any of your as- sets to get cash out. Of course, thanks to inflation, the effective value of your investment may decrease with time if you do this. In reality, most investors' aims tend to be more complex than just receiving carrent in- come. Ii you are interested in long term wealth combined with a certain level of security, you may need to employ both in- come and growth investments. Your decision may also be in- fluenced by external economic conditions, which will affect the earnings from the two choices. For instance, investing for in- come may be very attractive when interest rates are high. Or, an economic boom could make investing for capital gains in that sector more attractive. Of course, interest rates, in- dustry conditions and other fac- tors affecting investments can also be unfavorable. Under the circumstances, there is a strong argument to be made for mixing both income and growth strate- gies in your investment plan- ning, and being flexible about changing that mix. In general, a diversified position provides a higher level of security without hobbling performance -- al- though clearly the risk varies with the exact package. Another major consideration in making the choice for income or growth is tax implications, since interest, dividends and capital gains are all taxed dif- ferently. Interest and dividends from foreign corporations are the most fully taxed, followed by Canadian dividends and then capital gains. Interest and dividends from foreign corporations are taxed at your full marginal tax rate. This is independent of whether these gains are paid directly to you or to your mutual fund. Calculating the tax on divi- dends from Canadian compa- nies is more complicated. The federal tax calculation is based on 125 percent of the actual div- idend you receive. Your federal tax payable is your marginal rate of this "grossed-up" figure, subtract the dividend tax cred- it, which is 13.3 per cent of the grossed up figure. Provincial tax on this is a percentage of the federal tax, except in Quebec which sets its taxes indepen- dent of federal ones. Tax on capital gains is calcu- lated in a different way again. Of your total gains, 75 per cent are taxable at your marginal tax rate. However, you also are allowed a lifetime capital gains exemption of $100,000. In other words, you don't pay any tax on the first $100,000 of capital gains you earn. Capital gains include profits from mu- tual funds, real estate (al- though not from the sale of your primary residence), the stock market, precious metals and so forth. So, how does all this fit into your personal financial plan- ning? To a large extent that will depend on your needs and indi- vidual tax situation. For in- stance, if you have not yet used your lifetime capital gains ex- emption, you may wish to lean towards investing in growth to avoid taxes. You may also be able to invest to reduce your taxable income. For instance, in some situations it is profitable to borrow money to generate capital gains, since interest paid on amounts bor- rowed for investment is tax de- ductible. You may also be able to reduce your effective tax rate by changing your investment portfolio to provide more divi- dend income than interest in- come. At minimum, you should defer taxable income to future years with an RRSP and then a RRIF. To find out what the best strategy is for you, it would be prudent to talk to an invest- ment advisor. Your advisor may suggest, for example, investing in one or more of a family of mu- Robert J. Gow Examine Your Choices ROBERT J. GOW 434-7156 or 1-800-267-1522 RICHARDSON GREENSHIELDS i LL bh rr lL ea i ih i a [nvestment advisors to Canadian enterprise and enterprising Canadians 111 Simcoe St. N., Oshawa, Ontario L1G 454 RRSP's | INSTANT RRSP LOANS AT PRIME" IN NO TIME A Bank of Montreal Instant RRSP Loan can help you take full advantage of your full RRSP contribution limit. Ask us for details today. Jane Heacock, Personal Loans Manager *Bank of Montreal's prevailing prime rate. Available only until March 1st, 1994. Port Perry Bank of Montreal 1894 Scugog Street (905) 985-8446 aa Bank of Montreal We're Paying Attention tual funds, high dividend yield- ing stocks, bonds., etc.). That way, you can take ad- vantage of a number of golden geese. By mixing income and growth investment wisely, you'll get the best possible com- Rates subject to change without notice GUARANTEED INVESTMENT CERTIFICATES e ANNUAL RATES ° bination of wealth creation, se- curity and tax reduction. Courtesy of ~~ Bob Gow, Richardson Greenshields, Oshawa SCUGOG FINANCIAL SERVICES A DIVISION OF CRESSBROOK FINANCIAL PLANNING LTD. 250 QUEEN STREET - PORT PERRY "Serving Scugog for Over 15 Years" PHONE 985-3832 has extended its hours To make your RRSP contribution more convenient, we will be open until 9:00 p.m. on February 25, 28, and March 1 and until 4:00 p.m. on Saturday, February 26. Or you can deposit by phone, simply by calling 1-800-465-CIBC. Secure Your Future with a CIBC RRSP To book your RRSP Review Interview call 985-4444 Get us working for you! just for you