December 08, 2020
Not all Cash Flow is Created Equal
The Allan Bush Investment Team’s belief in our methodology of investing in securities that produce consistent income is unwavering, it is the first and last thing we look to when selecting and recommending the investments we suggest to each of our clients. Regardless of the current economic, political or global health environment, this continues to be true.
CRA provides a Dividend Tax Credit to incentivize investors to invest in businesses which lowers the amount of tax paid through a mechanism that is different between these two types via a difference to the gross up amount applied. This means that the amount of taxes you pay on eligible dividends is lower than those on non-eligible dividends. Because foreign dividends are paid out by companies that don’t pay taxes in Canada, this income has no preferred taxation status.
This type of income is the one that most investors are familiar with. Simply stated. it is the rate paid by the issuer of the investment vehicle or account in return for you placing your money with them or in their security. Interest income is typically paid out monthly, semi-annually or annually and for taxation purposes and is fully taxable and attracts the highest level of marginal tax.
Return on Capital (ROC)
This is a return of your own original investment and as such, is non-taxable. A return of capital distribution reduces the tax basis of the investment and can impact capital gains taxes when you finally sell the security. It is this form of cash flow that we find creates the most confusion for some investors. In many cases the cash flow is pegged at a predetermined amount and will stay at that level until the issuer of the security changes it. This level quoted as a percentage is often confused with an equivalent “return” or “interest rate” on the security.
For example, if the vehicle is paying out 8% ROC this does not mean that the rate of return or interest rate of that investment is 8%. In fact, in most cases the amount of monthly ROC has nothing to do with the rate of return on the underlying security.
In conclusion, not all cash flow is created equal. At CIBC Wood Gundy Allan Bush Investment Team, we pride ourselves in sourcing the most appropriate vehicles to satisfy your need for cash flow and balance that with your comfortable risk/growth profile. We will make suggestions based on your goals for growth, capital preservation and cash flow that may or may not include any of the vehicles discussed above.
This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2020.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.