Taxation on Different Forms of Income
It is likely that your various income sources in retirement will be treated differently for tax purposes. Your total income may come from many sources, some of which may be fully taxable, some may be tax favoured and some sources may not be taxable.
For most retirees, the majority of income is drawn from sources that are fully taxable. The obvious income streams that fall under this tax treatment include, CPP benefits and OAS benefits as well as any employment income and rental income. Income that is derived from registered assets, such as pension payments, RRSP/RRIF payments and income drawn from locked-in accounts through a Life Income Fund (LIF), is fully taxable.
Investment Income from Non-Registered Assets
Normally, if money is invested outside of a sheltered vehicle such as an RRSP or a Tax-Free Savings Account (TFSA), the interest, dividends and realized capital gains from those investments (otherwise known as “taxable distributions”) is taxable. These different types of distributions also receive different tax treatment, as described below.
Interest earned on non-registered investments is fully taxable. Furthermore, the interest earned must be declared and taxed annually, whether or not it was paid in cash (such as with compounding GICs or strip bonds). So GICs, bonds or bond funds, fixed income ETFs, mortgage funds and cash accounts distribute taxable interest on an annual basis. Some corporate ...