Quote:
Originally Posted by Slava
I can't understand what you're saying here? Its probably me because I'm working really long days at this point and I'm quite tired, but could you explain this a little more thoroughly so that I understand it better (hopefully).
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From a Cash account, assume 25% tax rate and 5% return on investment.
$1333 Pre-tax income
(333) Tax 25%
$1000 After-Tax income
Invest to earn 5% interest of $50
$50 interest income
(12.5) Tax on interest 25%
$37.5 after tax interest
From a RRSP/TFSA account, assume 25% tax rate and 5% return on investment.
$1333 Pre-tax income
Invest to earn 5% interest of $66.65
$66.65 interest income
(16.66) Tax on interest 25%
$50 after tax interest
Here I'm focusing only on investment income, interest, in this example. The difference between the two after tax interest income is 12.5 (50-37.5) which is exactly 25% tax on the $50 interest income earned from the cash account.
When someone asks me what is the value of a $1000 contribution room, I tell them it is $1000 x rate of return x tax rate. For capital gain, it's half of that and for dividend income, it is less than that usually due to dividend tax credit.