Canada: Tax-Efficient Sectors
Tax can be deferred on payments made into a registered retirement savings plan (RRSP). A tax deduction applies for amounts contributed to an RRSP, and so reduces taxable income. All income earned in an RRSP (including interest, dividends and capital gains) is tax free while it remains in the RRSP. Dividends from foreign-sourced investments may still be subject to withholding tax, although US-sourced dividends are not. Withdrawals can be made from an RRSP, but must be included in taxable income – withdrawals are subject to withholding tax on the full amount; note, though, the exception highlighted above in relation to Home Buyer’s Plan borrowings. The funds in an RRSP must be either withdrawn at age 71, or converted into a registered retirement income fund.
Canadian residents aged 18 years and over can invest in a tax-free savings account (TFSA). All investment income from such accounts (i.e. interest, dividends, trust distributions or capital gains) accumulate in the account tax free. However, dividends are not eligible for dividend tax credit. For 2012, individuals can contribute a maximum of C$5,000 to a TFSA. Unused contributions in one year can be utilised in other years, subject to any withdrawal made from the account.
Various tax credits are available at provincial/territorial level for investments in the common shares of a labour-sponsored venture capital corporation (LSVCC) fund. For example, in Newfoundland and Labrador, the tax credit is 20% of the amount paid for LSVCC shares, up to a maximum annual investment of C$10,000. In addition, investors can qualify for a federal tax credit of 15%, up to a maximum annual contribution of C$5,000. LSVCC funds invest in small and medium-sized enterprises with fewer than 500 employees, less than C$50m in assets at the time of investment, and up to a maximum of C$15m investment.