Your true return is what you make after you pay any fees, charges, and taxes. How much tax you pay depends on:
- The type of investment you made.
- The tax laws where you live.
- Whether or not you shelter your investments from tax.
- How much money you earn at work and from other sources.
Example: Let's say you buy $5,000 worth of stock outside your RRSP. A year later, the stock is worth $6,000, and you decide to sell. Your capital gain is $1,000. Assume you live in Ontario and your income tax rate is 30.8%. You'll have to pay tax on half of your capital gain ($500).
Your tax bill: You will pay $500 x .308 = $154 in taxes. This means you made $846, after taxes.
This is not your true return, though. Remember, you also paid fees to invest: $150 to buy the stock in the first place and $150 when you sold it.
Your total, after-tax return: $846 capital gains after taxes - $300 in fees = $546, or 10.9%.
So you see, investment costs and taxes can take a big bite out of what you make investing. Keep that in mind when you buy investments and when you sell.
Remember: Your true return is what counts
If you have to choose between two investments that make 5%, choose the one that has lower costs and/or better tax treatment.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.