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Having just gone through another tax season I thought it timely to run through how the Canada Customs and Revenue Agency looks at and treats the money that your money makes. The subject is more important than you think. It can affect a good many things from the amount of money you have in you pocket at the end of the year to government benefits you might have to pay back.

There is an easy exercise you can go through here while you read this. Go pull out your tax return and open it up to the page that has line 101 on it. For our purposes here today I would like to focus only on three lines 120 Taxable amount of dividends, 121 Interest and other investment income and 127 Taxable capital gains. To simplify the scenarios, I am making the assumption that $20,000 of income is received in each scenario, no other income is claimed and only the basic applicable credits are used.

Taxable Amount of Dividends Line 120: This line is where the grossed up taxable amount of dividends that you were paid for owning shares in businesses is reported. Generally dividend income will usually be paid in two ways. Either directly to you as income or it automatically gets re-invested in more shares of the company for you so that each year you own more shares than you did the year before. From this amount are generated Dividend tax credits, both federal and provincial, which will help to reduce the tax payable on the income. After the dividend is grossed up and credits are applied you would owe somewhere between $0 and $375 in taxes depending on the type of dividends.

Interest and Other Investment Income Line 121: This is the line where all interest income no matter the source gets tallied. Other than the fact that you have to pay taxes on each dollar you earn in interest, the worst part about interest income is that it is taxed in the year it is incurred whether you actually receive it or not. In some cases you could have your savings earn you $20,000 in interest income and not have actually received any money at all from it in that tax year. In many cases GIC's bought for the compounding effect of interest over 3 or 5 years will present this scenario. In this case on $20,000 of interest income you would have to pay approximately $2,500..

Taxable Amount of Capital Gains Line 127: This is a great line for several reasons. On this line gets reported the "taxable" amount of capital gains. Right now the CCRA only wants you to include half of what you realized in capital gains for tax purposes. Making the other half tax free. In our case our $20,000 of capital gains would result in a tax payable of only $60.

This is all interesting in an over simplified matter but the situation gets much worse when you start adding other income into the mix. I am going to add one more variable to this mix. Pension incomes, every dollar of these is taxable. I am going to add in OAS of $5,952, CPP of $6,500 and a work pension of $25,000 per year and re-calculate how the CCRA will look at the money your money has made you. Just for your information the basic tax owing on these three additional sources would be about $7,000.

The total tax bill worst case with the dividends scenario is $11,600 approximately, Interest scenario $14,400, and capital gains $10,600. I am fairly certain that the $300 per month difference between the best and the worst scenarios would be put to better use by you than by the CCRA. If you have more money claimed on line 121 (Interest income), than you did on the other two you might be placing yourself in a less than optimal situation at tax time.

I would implore you to take the time with your tax preparer or investment advisor to explore what options are available to you to minimize the money your money owes in taxes.

n Dereck Slattery is a Moncton-based financial consultant.