Tax planning doesn t end there, however. One of the most effective strategies is to hold your non-registered investments in securities that generate capital gains or dividend payments, rather than interest. That s because there are tax breaks associated with capital gains and dividends, but not with interest income. The following section, Taxation of investment income , illustrates how various forms of investment income are taxed. Next in line are capital gains, because only three-quarters of a capital gain is actually taxed.
Interest income enjoys no special tax status.
Income splitting can reduce taxes With advance planning, you may be able to reduce your taxes even further in retirement. One of the best ways is through income splitting, a way of equalizing the income streams of you and your spouse. Income splitting works because two moderate income streams are taxed less heavily than a single income stream of the same total amount. If most or all of the family income is attributable to one person, it s likely to be taxed at a high marginal tax rate. In addition, if both spouses have income from eligible sources, they ll both be able to claim the federal pension tax credit.