Ep. 37 | Is It Interest? Understanding the Real Source of Your Investment Returns

What do you actually earn from the stock market? If you think it's all "interest," think again.

In this episode, Tré Bynoe, CFP, CIM, breaks down the three types of investment income in Canada—dividends, capital gains, and other income—and explains how each one is taxed. This isn’t just technical terminology, but essential knowledge for anyone investing outside registered accounts or running a corporation. Understanding these differences can help you keep more of your money and avoid costly tax mistakes.

You’ll learn:

• Why not all investment income is treated equally
• How dividends work and why they’re tax-advantaged
• What counts as a capital gain and when it’s triggered
• Why interest income is often the least tax-efficient
• How corporate structure affects tax treatment
• The hidden power of asset location and after-tax returns

If you’re a professional, business owner, or serious DIY investor, this episode is for you.

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Transcript

Tre 0:00

Hello and welcome to the Plain English Finance Podcast the podcast dedicated to helping you make smart financial decisions. I'm your host, Tre Bynoe. I actually realized I can skip the rest of it because it's in the disclaimer at the end, so

Sierra 0:11

Oh,

Tre 0:12

yeah, I am me.

Sierra 0:13

But that was, so

Tre 0:15

look at the disclaimer. It wasn't satisfying enough for you?

Sierra 0:17

It wasn't satisfying. I, I'm like, keep going. We all know the rest, I'm not allowed to say it apparently, so I won't. But

Tre 0:23

no, it's just that they were like, uh. They question that one.

Sierra 0:27

Okay. Sorry.

Tre 0:28

Now they going to question this I'm sorry. and just don't say the word compliance.

Sierra 0:33

Yeah. then everyone's okay. Yeah.

Tre 0:37

Okay, perfect. This episode is the 37th episode and this one is, you asked me, I don't know if you remember this.

Sierra 0:46

I think I do.

Tre 0:47

Okay. What is it?

Sierra 0:48

Is it about, interest.

Tre 0:49

Yes,

Sierra 0:50

I know because I have been waiting.

Tre 0:52

I said, you asked me the question, I was like, that sounds like a great podcast episode.

Sierra 0:57

I didn't get an answer. It's been like two months.

Tre 1:00

It's been a while.

Sierra 1:02

And you just, Tre actually just went on another podcast today, and I just found out that I'm not going to get to hear the episode until March. And I'm like,

Tre 1:10

but this will be out in January time. So people will be like, why are you complaining?

Sierra 1:15

That's true. Yeah. Okay. It's. Like mid-December right now. So three months for me to have to wait.

Tre 1:20

No. You don't know. It's my first guest appearance on a podcast. Yeah. So I mean, when it comes out, so good.

Sierra 1:25

Check it out right here. Just kidding.

Tre 1:27

No,'cause this is going to be first.

Sierra 1:30

Oh yes. And so I'm, also we don't do that little clip thing in the middle. So I mean,

Tre 1:34

you could, because it would be, this part will be on YouTube, but

Sierra 1:36

Oh, right.

Tre 1:37

Unless you're going forwards in time, there's going to be

Sierra 1:39

yes

Tre 1:39

no note to it. So... I actually have no idea how, I'll share it somehow.

Sierra 1:44

Yeah, for sure.

Tre 1:45

I'm interested because it was, it was mainly about, it was more personal than I thought it was going to be.

Sierra 1:50

Yeah, that's what you said. And that's why my interest was immediately peaked. I was like, what did you talk about? What did you say? He is making me wait until March with the rest of you.

Tre 2:00

So, yeah, exactly.

Sierra 2:02

This is, take this as your little, uh, teaser, is that what they call it? Yeah. I don't know.

Tre 2:06

It is coming, but yeah. Anyway, okay. So do you remember what the question was?

Sierra 2:11

Okay, I asked. What you get back from the markets, is that called interest? That's how I was questioning it, is that just like a return? I've heard dividends, I know I have something with dividends.

Tre 2:27

It's a great question and it's a question that I, you always tell me off of knowledge bias. Yeah. And it is so true that, I mean, you get to it, it feels like the more I learn, the less I feel. I know. But you have to also remember that not everybody is as neurotic about this type of stuff, as I am

Sierra 2:53

I like that. Um, no, I did. Yeah, I agree. Once you are so into something, you are like, doesn't everybody know this? Maybe not consciously, but you are questioning that.'cause I do the same thing with all of my knowledge on certain topics that I won't mention right now, but will probably come up later.

Tre 3:12

Okay. So... this podcast is going to stay about finance. Okay?

Sierra 3:18

Okay. Okay.

Tre 3:20

So the question was a great question is it interest? There's a few things that you have to understand and this, honestly this type of information only becomes valuable to somebody once they do two things. Once they're no longer an employee. Mm-hmm. Or they start investing outside of registered accounts.

Sierra 3:41

Okay.

Tre 3:42

What do I mean by registered accounts?

Sierra 3:44

a TFSA, a RRSP, RESP, RDSP.

Tre 3:48

Yes. Correct. All of those things. Yeah. So, there are, technically more, but I'm going to go with three types of income in Canada. Okay. You have dividends. That's one type of income. Yeah. You have capital gains.

Sierra 4:06

Okay. I've also heard that.

Tre 4:07

Yeah. That's another type of income. Yeah. And then everything else.

Sierra 4:12

Nice.

Tre 4:13

Okay.

Sierra 4:13

Love that. Like miscellaneous category. Yeah,

Tre 4:16

absolutely. So what is a dividend?

Sierra 4:21

I have no clue off the top of my head. I just know

Tre 4:23

That's fair.. Yeah. So

Sierra 4:24

it pays in dividends. I've heard that.

Tre 4:26

So a dividend is money that a corporation has already paid tax on and it's giving it to its shareholders.

Sierra 4:35

Okay, say that again, sorry.

Tre 4:37

So I own a company. Mm-hmm. If the corporation has paid tax on that money already.

Sierra 4:43

Okay.

Tre 4:44

It gives out a dividend to its shareholders. Okay. So I'm a company, I make a million dollars. You own me as a shareholder. I pay my tax on it. Then the rest gets sent to you and then you pay your tax on it.

Sierra 4:58

Okay.

Tre 4:58

That's a dividend. You get dividends from companies in general and there's two types of dividends but won't go into that. So dividends. Capital gains, what's a capital gain? You can say, I dunno.

Sierra 5:12

I don't know, but I want to take a guess.

Tre 5:15

Take a guess, take a stab at it.

Sierra 5:16

It's, something about the tax as well. Like you have to pay tax on it still, or the company hasn't paid.

Tre 5:22

Yeah, it's the type of income.

Sierra 5:23

The company hasn't paid tax on it yet. Maybe

Tre 5:26

Not quite. So it's the difference between what something is purchased for versus what it's worth when you sell it.

Sierra 5:34

Okay. Yeah, that makes sense.

Tre 5:36

So I buy a property, I buy an investment property for$300,000. It goes up.

Sierra 5:40

Mm-hmm.

Tre 5:41

This is oversimplifying it, but it goes up to$500,000. The difference between what I paid for it, that$300,000 and what I sold it for$500,000 leaves$200,000

Sierra 5:53

Of capital gains.

Tre 5:54

That yes, that's a capital gain.

Sierra 5:57

You're I know you're saying like this is oversimplified. That's why

Tre 6:00

yes. Yeah. I'll come back to that'cause I'll explain how it's taxed. Yeah. And then there's other income What would be considered other income?

Sierra 6:09

Your job, side hustle

Tre 6:11

Literally anything else that doesn't fit into those two categories. Okay.

Sierra 6:15

Okay.

Tre 6:16

So it includes interest income. What is interest income?

Sierra 6:21

That's the question... like I, yeah,

Tre 6:23

So what is interest?

Sierra 6:24

I know you get interest from the bank if you have a savings account,

Tre 6:27

What about how do you pay interest?

Sierra 6:29

Loans. Mortgage.

Tre 6:31

Okay, so it's the same thing?

Sierra 6:32

Yeah.

Tre 6:32

Could you try to define it?

Sierra 6:35

If you're paying it, it's the fee you pay to borrow money. If you're earning it, it's because you are lending money.

Tre 6:43

Exactly. So it's the cost of using somebody else's money.

Sierra 6:47

Okay.

Tre 6:48

Or the earnings from somebody using your money. But basically that's what interest is. Yeah. Whether you're receiving it or paying it. It's the same thing. So we call that a fixed income type of investment.

Sierra 7:01

Oh, yes. Okay. Yeah. Yeah. It's

Tre 7:03

often the fact your, downside is limited.

Sierra 7:06

Mm-hmm. And

Tre 7:06

so is your upside. So if I give you a million dollars. We have an agreement that you are going to give me 5%. Mm-hmm. You are going to give me$50,000 a year regardless of what you do with that million dollars. And then it's on me as the lender to make sure that it's you're trustworthy. All of that stuff. Yeah. But that is a fixed income arrangement and there's lots of different types of, fixed income, but they, for the most part. They pay interest. Mm-hmm. Okay. Okay. Same for, and that comes under the other category. Same for a job. You going out and you working a job.

Sierra 7:44

You're changing

Tre 7:44

is other income

Sierra 7:45

time for

Tre 7:47

Yeah. like your salary or anything like that. Even business, like a sole proprietor, this is other income. Okay. Yeah. Okay. So the way that they are taxed in Canada, so you'll see tax brackets here brought up. So we can look at the 2026 one'cause why not? I think this will be coming in'26. So yeah, so you see there's three categories, so other income, capital gains and then a big category. Canadian dividends. We'll ignore the two different types. Okay. Okay. So, what you'll notice in the Canadian tax system that there's tiers, so on the first 54,000, it gives you what the tax rate is. Then tiers after that. This is for Saskatchewan. Okay. So the higher income you are, the more tax you pay on the income earned in that bracket, not on everything. So often people think that it's on everything, so it doesn't make sense to earn more.

Sierra 8:45

Oh, right. Yes, we've talked about that before.

Tre 8:47

But most, I would say 99% of the time you will have more in your pocket by earning more.

Sierra 8:53

Yeah.

Tre (2) 8:53

Okay. It's just that the higher numbers, you'll be taxed at a higher rate on that income. So above$258,000 you're taxed at 47.5%.

Sierra 9:05

Yep.

Tre 9:06

Okay. So this is where tax planning comes into place because you want to move income from years where you're in a much higher tax bracket. Yeah. Moving it into years where you have a lower

Sierra 9:16

tax bracket,

Tre 9:17

personal income. Right? Yeah. When it comes to a capital gain that's taxed, did you notice something consistent between the capital gain number and the other income number?

Sierra 9:30

It's half.

Tre 9:31

Yes. So the way that a capital gain is taxed is, so let's go back to a house example.$500,000 house. Yep. You bought it for 300,000. That's say$200,000 capital gain. Half of that is free.

Sierra 9:49

Okay.

Tre 9:50

The rest of it is just added to for simplicity other income, so you're taxed on half of the gain as regular income. Okay. Is an easy way to think about it.

Sierra 10:03

Yep, that makes sense. Okay. Yeah. Okay.

Tre 10:06

For a dividend, it's slightly different. So this is where the cool tax stuff comes into place with a corporation. Because remember I said what a dividend is, it's money that has what in a corporation?

Sierra 10:22

Like taxed?

Tre 10:23

They've already paid tax on it. Exactly. So it's not fair if that income is taxed at the same rate as your personal income, because that hasn't been taxed yet.

Sierra 10:32

Okay.

Tre 10:33

Okay. So there's something called,

Sierra 10:34

wait, sorry, what hasn't been taxed yet?

Tre 10:37

So I have two people. One of them owns a corporation and one of them is a sole proprietor. Yeah. Both plumbing companies, let's say. Okay. Um, sole proprietor earns a hundred dollars. After profit, they get taxed under other income. A hundred dollars. Yep. If that is a, uh, if that is within a corporation, if they were taxed on it as a hundred dollars. So they pay their corporate tax and then they're taxed a hundred dollars again under their, and

Sierra 11:04

you're paying so much

Tre 11:04

personal income. You're paying your double taxed There's double taxation. Yeah. So there is a principle in our tax code called integration. And that is, it's not perfect, but it's the idea that you shouldn't pay tax twice on money. Yeah. So how would that, so whether you, yeah, whether you earn money through a dividend or earn it as a sole proprietor through a salary, it should equal about the same. Yep. And it's relatively good. There are. parts when it's not, but overall you'd say it's pretty good at doing so. So there's two types of dividends eligible and not eligible, but we'll focus on eligible. Okay. So what happens is you get a hundred dollars of dividend, it's then grossed up. So on your taxes, they, it's recorded as if their company hasn't paid tax on it yet. Yeah. And then you get a tax credit for what the company would've paid in taxes to try to equal it out. So I have, for simplicity, I'm going to use, these are not true numbers, but I'm going to use them. So let's say there's a 20% tax in a corporation. Mm-hmm. So if I earn, if I'm taking a hundred dollars out of the company.

Sierra 12:18

Yep.

Tre 12:19

They, on my tax return, it's grossed up to that$120.

Sierra 12:23

Okay

Tre 12:24

and they say, okay, this is what we're going to tax you on. This is your taxable income because we need to represent what it would've been if it was in the other income. Yep. And then we're going to give you a credit. We're going to reduce your taxes by what the company's already paid.

Sierra 12:38

Okay.

Tre 12:39

Is the process that it kind of goes through.

Sierra 12:42

Follows. I think I'm following. It's a little murky, but I think I'm following.

Tre 12:47

That's okay. Do you want me to try it to illustrate it a different way?

Sierra 12:50

Maybe give one more example, like

Tre 12:53

Show you. We're going to say that there's two companies or two people the sole proprietor and the corporation, and they both earn a hundred dollars. Yep. Okay. So with the sole proprietor, a hundred dollars goes into other income. Okay. And let's say they're taxed at.

Sierra 13:12

Just do the first one.

Tre 13:13

No, it's way too hard I need an easy number. We'll do, I'm going to say 50%.

Sierra 13:18

Nice. Really high tax rate.

Tre 13:20

Okay. So after taxes, this person that had a hundred dollars gets$50 after taxes. Okay.'cause they took$50. Yep. Government takes$50. Yep. Within the corporation, let's say that there is a 20% tax. So the, at this level, a hundred dollars comes into the corporation, tax man takes$20, which means there's$80 left in the corporation. The corporation then pays out a dividend of$80. Okay.

Sierra 13:47

Okay. Who is he paying that to?

Tre 13:49

The shareholder, the owner of the company. Okay. Okay. So the person gets back$80 and then. The government says, if we take 50% of$80 it means that you would be left with$40. Mm-hmm. And we've taken how much tax?

Sierra 14:05

20.

Tre 14:05

Because we took, well, we took 20% at the corporate level, and we would've taken how much at the personal level as well, if the tax rate was 50%.

Sierra 14:12

50. Oh, wow. Yeah.

Tre 14:13

If it was 50, so it would take 50%. So we've taken another$40. Yeah. Right. So then the government ends up with how much

Sierra 14:21

isn't that Everything? Oh, sorry. Okay. 60,$80, right?

Tre 14:28

$60. So

Sierra 14:30

total,

Tre 14:30

yeah. So the government takes$20 up here.

Sierra 14:33

Okay. Yeah.

Tre 14:34

And then they take another$40 at the personal level.

Sierra 14:37

Okay. Yep.

Tre 14:38

So that means individual is left with$40. Government is left with$60, but

Sierra 14:43

the shareholder is left with$40.

Tre 14:44

Yeah.

Sierra 14:44

So the corporation has earned nothing.

Tre 14:47

No. The corporation earned a hundred dollars.

Sierra 14:50

But it's paying its shareholders. I'm sorry.

Tre 14:53

So

Sierra 14:54

I'm lost, so we have no money now? That's a,

Tre 14:56

The corporation has no money. Well, it okay, but no, you're trying to equal out, once it's gone through corporate or whatever the tax structure somebody has, they're trying to equal out the amount of tax that would've been paid.

Sierra 15:08

Yep. I get that.

Tre 15:09

So there's no difference. So the corporation earns a hundred dollars.

Sierra 15:14

Yep.

Tre 15:14

The owner of the corporation. Is now getting paid.

Sierra 15:18

Oh, gotcha. Okay.

Tre 15:19

Okay. So,

Sierra 15:19

it's not okay, sorry. I forgot about the owner being a shareholder too, right?

Tre 15:24

Yeah. They own the company. Yeah, they own the company. They shareholder. Yeah.

Sierra 15:27

So if it just depends on how they're structured?

Tre 15:31

Yeah. So, whole point... no, you're confusing me. But, the whole point is that no matter whether somebody was to incorporate and earn money through a corporation

Sierra 15:42

Yeah.

Tre 15:42

Or earn money personally.

Sierra 15:44

Yeah.

Tre 15:44

There shouldn't be a difference once it gets to your personal hands in the amount of tax that you would've paid. Is the point. So if they don't have integration, this is what would happen. They'd take, let's say it was 20%. They'd take 20% originally. And then they would take another$40. Yeah.'cause it's 50%. And you would end up, the individual would end up with$40 and the government would end up with$60. That's not fair. Right. So the way that they do it is corporation gets a hundred dollars in CRA takes$20. Yeah.$80 is left when it gets to the personal hands. There's$80 left, but the government says, whoa, whoa, whoa. We know that you've already paid corporate tax on this. Mm-hmm. So we are going to, on your tax return, we are going to put a hundred dollars.

Sierra 16:34

Okay.

Tre 16:35

And then it's going to say, you owe$50 of that.

Sierra 16:38

Yeah.

Tre 16:38

So$50 will hit your income as your income tax. Mm-hmm. And the government would say, but you've already paid 20. So we'll give you, we'll reduce your taxes. By$20.

Sierra 16:49

Okay.

Tre 16:49

So then they say, okay, well here's your deduction. So in the end

Sierra 16:54

30,

Tre 16:54

you owe$30 on the personal side.

Sierra 16:56

Yeah.

Tre 16:57

Company's already paid$20. So in this scenario, CRA gets$50.

Sierra 17:03

Yeah.

Tre 17:03

You get$50. Yeah. Which is exactly the same as if you had earned it without a corporation. Yeah. That's why when people say, just jump to incorporating without actually thinking about what they're actually doing with their money. It's not always the best scenario.'cause while this looks like it's equal with a corporation, there's a bunch of other costs and expenses and stuff like that. Yeah. So it's, you're adding complexity for nothing if all you're doing is bringing the money out anyway to your personal hands.

Sierra 17:33

Right. Gotcha.

Tre 17:34

The benefit of a corporation is that you don't have to bring it out to yourself personally. Yeah. You can leave it in here, only paying that$20. Right. And then go and invest the$80.

Sierra 17:44

Gotcha. That makes sense. And then, yeah, you can use other tools to like, push the taxes into a different

Tre 17:51

Yeah, absolutely.

Sierra 17:52

Year or like, not put it in a,

Tre 17:53

because I'm using$50 here, but it's not, you saw the tax brackets, it's not. 50%. It's,

Sierra 17:58

Thank goodness.

Tre 17:59

Depends on the bracket and et cetera. What do you mean? Thank goodness it's almost 50%. It's ridiculous.

Sierra 18:05

One I was looking at was like 20 something.

Tre 18:07

Yeah, but it's on the first on the first. Well,

Sierra 18:11

right now I'm not working so

Tre 18:14

well. You are there. Don't say that.

Sierra 18:16

Yeah, there,

Tre 18:17

there is.

Sierra 18:18

I'm not employed at a job. That's what I'll say.

Tre 18:24

Yeah, top tax rate is 47.5%, so yeah. Not a fan. Anyway, so that's the way that a dividend is taxed.

Sierra 18:32

Mm-hmm.

Tre 18:33

Then difference between an eligible and a non-eligible dividend is it depends on the tax rate that it was taxed at inside of the corporation. I don't know if you remember me saying that the government wants businesses to invest. Yeah. They want to encourage businesses to invest, but not every business is equal.

Sierra 18:53

Yeah.

Tre 18:54

Small businesses are riskier. Right? Most people will have, if you're going to have a business, you're going to have a small business. What they do is there are two different tax rates, depending on the amount of income and profit in the business. So again, this is not exact, but I'm going to say, for principles sake, it's$500,000. So the first$500,000 of revenue is taxed at a lower rate than everything else. Yep. So if it's money that's been taxed at a lower rate, it's a non-eligible dividend. So you'll notice that the tax rate is higher

Sierra 19:33

Yep. It's just basically the, whole idea is, listen, everyone should be paying the same amount of taxes. They just decided to really complicate it, it seems? I don't know, like, it,

Tre 19:45

It's because there's, a lot of benefit, other benefits to using a corporation and stuff like that. Yeah. But basically the ultimate goal is that it's reasonably equal. Yeah. Often what puts... This is a completely different podcast episode. But often what puts people over the edge when they're deciding whether to take a salary, which is other income or dividends, which is what we just described, is the fact that CPP isn't included. CPP contributions isn't included in this equation.

Sierra 20:10

Okay.

Tre 20:11

So if you're paying a salary, you're paying CPP contributions, whereas with dividends, you are not paying CPP contributions. Mm-hmm. But when you actually look at the integration, oftentimes you're actually paying more tax. Just less overall because of the CPP contributions. Anyway, different episode.

Sierra 20:27

Yeah.

Tre 20:27

We'll get into that at some point, but, okay. Does that help you understand the differences with the income?

Sierra 20:31

Yes.

Tre 20:32

Okay. Now let's relate this to the stock market, which was your original question.

Sierra 20:36

Yeah. So I was like,

Tre 20:37

"Answer the question for me."

Sierra 20:38

Yeah.

Tre 20:39

So money that you get from the stock market. What is it?

Sierra 20:45

I feel like it could be all three.

Tre 20:47

Tell me why it would be, why each one, Tell me what, why you think it would be,

Sierra 20:52

Capital gains. Um. Sorry. When I take too long, I start overthinking. I'm like, oh my gosh, I'm taking too long to answer. I'm not fine. It's fine. I'm not even thinking of the, the question or the answer anymore. Okay. And then I'm just going to

Tre 21:10

I'm not going to save you, so

Sierra 21:12

Okay. Capital gains is when you buy something and then when you sell it at a higher price. That difference. So if you buy a stock. At$3 and then you sell it at$5, that's a capital gain of$2,

Tre 21:28

Correct. A hundred percent. So capital gains is one and you've applied it correctly.

Sierra 21:32

Yes.

Tre 21:32

You said all three though, so,

Sierra 21:34

Oh, no.

Tre 21:35

Dividends or other income. You pick one. Which ever one you want.

Sierra 21:38

Yeah, I was going to say dividends. So you are investing in a company,

Tre 21:46

So you become what?

Sierra 21:47

A shareholder.

Tre 21:48

Correct.

Sierra 21:49

So. If the company has paid the taxes and then gives you, it's like that thing you just showed me.

Tre 21:58

Mm-hmm.

Sierra 21:59

Right? Like the piece of paper. So then you're going to get a tax receipt or whatever. Is that how it goes?

Tre 22:05

So they will give you a dividend, right? Yeah. So they've made money, they paid, they've made profit. Yeah. They paid the taxes on the profit.

Sierra 22:11

Yeah.

Tre 22:12

And then they're giving you what's left over. To the shareholders. That is a dividend.

Sierra 22:16

Yeah. Okay.

Tre 22:17

So dividends and capital gains, you've applied those both correctly. Don't worry about which one it would be.

Sierra 22:22

Okay. Yeah. Oh, I won't

Tre 22:26

Now I wanna ask you and make you there, but I'll get it

Sierra 22:28

No. I don't.

Tre 22:29

Okay. So capital gains, dividends. Now tell me how other income could be.

Speaker 6 22:35

Um.

Tre 22:40

Okay, I'll save you.

Sierra 22:42

Yeah.'cause I'm, I'm not sure. I wanna say what if the investment is made a certain way? I don't know.

Tre 22:48

Are you... again, oversimplifying. Are you ever lending money in the stock market?

Sierra 22:57

No.

Tre 22:58

So you don't get interest.

Sierra 23:01

Wow.

Tre 23:02

When are you lending money

Sierra 23:06

Bonds.

Tre 23:06

Correct.

Sierra 23:07

Heck yes.

Tre 23:08

Then you get interest. Yeah, and there's another type of income that you can also get from bonds. Capital gains.

Sierra 23:15

Okay.

Tre 23:15

And that's dictated by interest rates and things like that, which actually will be a different episode. We'll do that as well. But yeah that's how it works. And how that fits into the bigger picture is because you can see that they're all taxed in different ways, especially when it comes to holding a corporation. The type of investments you hold makes a big difference to the amount of tax that you pay because of the type of income it is. And in a corporation, certain types of income are taxed at a significantly higher rate. Based on this example, could you see why the government would tax them at a significantly higher rate if you've only paid the first layer of tax?

Sierra 23:57

Sorry, which point are we talking about paying?

Tre 24:00

The higher rate. So the whole point is, remember, to try to make it as even as possible. If this individual gets to the end of everything. And they have$50 to invest. Yep. And they go buy a 10% GIC keep it crazy and easy. They get$5 of interest.

Sierra 24:17

Yep.

Tre 24:18

Let's say next person, how much do they have left over to invest?

Sierra 24:22

$80

Tre 24:22

And they go buy a 10% GIC. How much interest are they getting?

Sierra 24:27

Eight.

Tre 24:29

So because they say, okay, well this guy only gets five and this person would get eight. It's not fair. Therefore, inside of a corporation, types of income like interest income, are taxed at a very high rate.

Sierra 24:43

Okay.

Tre 24:44

And there's certain mechanics that makes it a little bit more complicated. But that's the essence, that it's not fair. So they come in and they tax it at a much higher rate. But there are types of income inside of a corporation, that the government does want you to do so, doesn't tax you at a higher rate. Could you think of what type of income that would be on these if you have these three options?

Sierra 25:09

Canadian dividends. Non-eligible? Eligible?

Tre 25:13

I was, I put that the whole bracket. Just Canadian dividends.

Sierra 25:16

Okay.

Tre 25:16

Yes. Because the government wants to incentivize you investing in even other companies and specifically Canadian companies.

Sierra 25:24

Yeah, that makes sense for the economy.

Tre 25:26

Yeah. So they don't penalize you for doing the same thing. So when it comes to where do you put investments, that's why it matters. That's why it's something we call asset location. Because putting investments, you can have the same portfolio and one is done properly and correctly. Um, so you're optimizing the after tax consequences. And one of them could be not, and it could be thousands and thousands of dollars of difference due to tax just over the course of somebody's lifetime. Hmm. So that's why asset location is important. And honestly, when it gets to a certain point of wealth, that becomes more important than even what you're holding.

Sierra 26:04

Right.

Tre 26:04

You earning an extra or the potential to earn an extra 1% here or there isn't as important as you optimizing how you are actually investing.

Sierra 26:14

Yeah.

Tre 26:15

Which is the difference between what I like. There you go. Next time somebody asks you what I do, instead of being generic, you can tell'em that. That right there is the essence of what I do.

Sierra 26:25

Say it again. Say the line. I'm supposed to say

Tre 26:28

No, you have to give them the whole, the whole example. Show them tax rates.

Sierra 26:31

I'm not doing that. No, I'm just saying that he's a financial planner. Like I always.

Tre 26:36

A lot of people think that all financial planners are the same

Sierra 26:39

Or they think. Oh, at a bank?

Tre 26:41

Yeah, but the understanding of how this integrates. And how to do it properly is rare.

Sierra 26:47

Mm-hmm.

Tre 26:48

It's pretty rare when it comes to, when it comes to us, because you have to have such a. such an understanding of the corporate tax side to make it work and most, if you never have to, why would you?

Sierra 26:59

Yeah, I mean, great question. As I'm like,

Tre 27:01

yeah, 99 plus percent of Canadians never touch these other things outside of a few times in their lives. So yeah, if you are a financial planner and you're serving lots of different types of people, it's likely. You're not going to get, it's not worth the effort to

Sierra 27:18

Yeah.

Tre 27:18

To dive into all this stuff. Yeah. But yeah, now you have your answer to your question. So, you know different types of income.

Sierra 27:24

Ah my capital gains

Tre 27:26

Sure. I'll be like, okay. Okay.

Sierra 27:28

I don't know if that's right though. I still, I'm just going to be like, how do I know if it's a dividend or a capital gain?

Tre 27:35

But you could tell by the type of transaction. Right. So like a capital gain. Did I this is still over simplifiying and I'm like, to where this doesn't apply... but simply put you could say, did I sell a stock? The answer is no. If that's not how you got the money, then it's probably not a capital gain. If the company gave you money for being a good owner, that's a dividend.

Sierra 28:02

Okay, so, oh, I think. Sorry, I'm, you know what? My mind's like working and I can't get it out. Yeah. That's what's happening. So you, you only get the income when you sell.

Tre 28:17

Not the income. A capital gain.

Sierra 28:19

Yes. But I'm saying like, if you're looking at your portfolio and you're, my portfolio is at$500,000. You haven't actually taken that money yet.

Tre 28:32

Correct.

Sierra 28:33

So in your mind you might be like, oh, I have$500,000. Maybe people don't do that, but you don't actually, until you do something about it, you have to sell it or the company has to

Tre (2) 28:47

Kind of, Yes. No, no, you are absolutely on the right track where. A lot of people don't think of the after tax value of whatever they're holding. Mm-hmm. Somebody with a million dollars in an RSP vs somebody with a million dollars in TFSA They'll think they're both millionaires. They ain't. I would much, they... they ain't. I would much rather be the guy with the million dollars in the TFSA than a RSP because I can go spend a million dollars. Yeah. If it's a million dollars in a RSP I still have to pay tax on that. And same principle applies, that's another reason why tax efficiency is so important. So capital gains, you trigger those. I decide when we sell this item. So I have a lot more control over when I take that income. Yeah. Because it's only income. It only hits my tax return when I sell it.

Sierra 29:35

Yeah.

Tre 29:35

It can be, it can grow to whatever it can be. Sit can sit there for 30, 40, 50 years. As long as I don't sell it, I don't pay tax on. What it's grown to. A dividend though. Different? A dividend. As soon as the company pays it, I pay personal tax in the year that that is given to me so I don't have as much control.

Sierra 29:57

So where does the money go if a company is paying a dividend? Does it just go into your checking account? Or is it in your investment portfolio?

Tre 30:04

It's in your investment portfolio.

Sierra 30:06

As cash, like would they just give it to you and you would hold it in cash until you buy something else or do something with it.

Tre 30:13

Yeah, I'll show you. Oh, I'm obviously not going to show the audience, I'll just bring up, I'll bring up our investments and I'll show you exactly and then we'll cut this episode because it's

Sierra 30:26

Is it a long one, I think. Is it? Uh, oh. I think it says 30 something.

Tre 30:31

Oh, okay. That's fine.

Sierra 30:36

The audience is like wrap it up.

Tre 30:38

Yeah. It's okay, we get it

Sierra 30:40

they're like, oh my gosh. It made sense the first time. Wait

Tre 30:46

Oh, markets are down today.

Sierra 30:48

Oh,

Tre 30:48

That's the extent of my reaction by the way when markets are down. Or whenever they are down. Okay, so if we go to

Sierra 30:57

I just have to say, I feel like you're loving this conversation. I can just tell you're like, excited that I'm getting it.

Tre 31:04

I'm exciting at all different types of conversations.

Sierra 31:06

Wait, what? No, you are excited, not exciting. You're excited that I've got a handle on it. I feel like

Tre 31:14

Yeah. I, you've grasped it well.

Sierra 31:17

Yay.

Tre 31:18

Does it make you feel happy.

Sierra 31:20

Well. You know, like,

Tre 31:22

cause you're going to forget it.

Sierra 31:23

I will. Yeah. Is it a retention? That's the problem. I'm like, oh yeah, I get it. And then a month later I'm going to be like, I forget.

Tre 31:33

Fair enough. Okay. So you'll see here it says,

Sierra 31:36

I can't really see very well. Just

Tre 31:38

It says US cash dividend. This is Nvidia, so it pays out a dividend and that just goes to cash. And Nvidia is so big right now that the dividend is next to nothing, but that would then be either reinvested or can be whatever it, but in our portfolio, it just, it will sit in cash for a little bit until I go and personally reinvest it.

Sierra 32:07

Okay. But you could set it up as. If this dividend gets paid out, put it back in or do it do this. Okay.

Tre 32:14

Yeah, so there's lots of companies that you can do that with some you can't, but vast majority you can, and that's where this cash balance here comes from. It's just. Dividends and distributions and things like that from the investments that get paid out. So when you're looking at tax efficient investing, a lot of that you want to minimize. Which is why even you could have there's so much more to investing as soon as you have to think about this type of thing.'cause you could have two investments that both earn 10%, but one person gets to keep significantly less after taxes. Than the other investment. You could even have an investment that earns less than the guy that's earning 10%, but because of the taxes and the way it's taxed, it could end up being different. The person that earned less as a percentage ends up keeping more. Yeah. And that's a really hard principle that a lot of advisors don't even understand, let alone individuals.'cause, you have to compare after tax results because it matters

Sierra 33:14

Yeah.

Tre 33:14

Significantly more than

Sierra 33:16

pre,

Tre 33:17

than pre-tax because you can't spend pre-tax dollars on a boat.

Sierra 33:21

Yeah.

Tre 33:21

Anyway, hopefully that made sense. Hopefully that, did that answer your question?

Sierra 33:25

Yep.

Tre 33:25

You have a good enough knowledge now to be able to determine yourself what type of income

Sierra 33:31

I don't know about that.

Tre 33:31

It would be,

Sierra 33:32

I'm just probably going to keep saying. I'm just going to keep saying interest.

Tre 33:38

You could say. You could say it is and the thing about it's smart, but Yeah, the thing about it is we use different terms for it. I might even say the return or something like that. Yeah. And you're talking about

Sierra 33:47

Return makes sense to me because it's just a blanket, vague statement, more than specifically saying

Tre 33:56

Absolutely. Yeah.'cause even when I say, Hey, market's made 15% this year. Part of that's capital gains, part of that's dividends, part of it's mm-hmm. A whole host of things.

Sierra 34:07

Yeah.

Tre 34:07

And again, depending on where you keep it depends on how much you get to keep of that. And I would much rather earn 10% as a capital gain than 10% as a bond. Right. As a GIC And that's something that a lot of people, even with GICs don't understand that they might look at the markets and say, well, if I'm, let's say it is 5% that the market's getting. And then they're getting 5% on their GIC They might look and be like, why would I ever, put money into the markets? Well, the 5% that I earned, I got to keep 80% of it. Yeah, 5% you earned, you got to keep. 50% of it. So it's not the same after taxes. And that's, that's the part that matters is after tax return.

Sierra 34:48

Like, what do I get to spend?

Tre 34:49

What do I get to spend? Yeah, absolutely. Okay. Anyway, that's, we'll leave it there. Okay. The next episode Oh, it was going to be on Notion and Accounts and what they are. And how that works.

Sierra 35:03

But I'm glad that you're, you said that was what it was going to be about.

Tre 35:08

You don't wanna do that one? It would probably be better that we do that one because you have a basic understanding of dividends.

Sierra 35:15

Okay. Let's do it. Everyone. We're doing it. It would try.

Tre 35:20

We might. We might. We're doing a back to back. Yeah. It might pivot, but we'll see. We'll see. Okay. Anyway, we'll see you guys in the next one.

Sierra 35:27

Bye.

Tre 35:27

Bye.📍📍Thanks for listening to this episode of the Plain English Finance Podcast. Tre Bynoe, certified Financial Planner. Chartered Investment Manager is a financial planner with TCU Wealth Management and Aviso wealth. You should always consult with your financial, legal, and tax advisors before making changes. This podcast is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell at any securities. The views expressed are those of the individual and are not necessarily those of Aviso Financial Inc. Mutual funds and other securities offered through Aviso wealth, a division of Aviso Financial, Inc.📍📍Thanks for listening to this episode of the Plain English Finance Podcast. Tre Bynoe, certified Financial Planner. Chartered Investment Manager is a financial planner with TCU Wealth Management and Aviso wealth. You should always consult with your financial, legal, and tax advisors before making changes. This podcast is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell at any securities. The views expressed are those of the individual and are not necessarily those of Aviso Financial Inc. Mutual funds and other securities offered through Aviso wealth, a division of Aviso Financial, Inc.