One critical consideration of computing returns is that pre-tax is an easy calculation, but after-tax involves a bit more effort.
In Canada, interest income (and distributions of income from trusts) is taxed at your marginal rate. Foreign dividends are also taxed at your marginal rate. Dividend income from publicly traded Canadian companies are taxed at a very favorable rate. Capital gains are taxed at half your marginal rate.
As a result, portfolios should be structured such that income is maximized in sheltered vehicles (RRSPs, TFSAs) while Canadian dividends and capital gains are preferentially outside the RRSP and TFSA.
Your marginal rate depends on what province you live in and also what income bracket you are in.
So if you live in British Columbia, and make a taxable income of $50,000, your marginal rate rate on an extra dollar of interest income would be 29.7%. So to realize a 10% after-tax return on investment, you need to earn 14.2% on a pre-tax basis. Alternatively, you could also earn a 11.7% return via capital gains, or a 10.1% return via eligible dividends. It all amounts to the same: a 10% after-tax return.
The following tables are a simple illustration of the required pre-tax returns required to achieve a 10% after-tax return:
| BC 2010 Tax Rates | 10% after-tax equivalent | ||||
| Marginal | Cap. | Eligible | SB | ||
| Low Range | High Range | Rate | Gains | Dividends | Dividends |
| $ – | $ 35,859 | 12.5% | 11.1% | 8.9% | 10.4% |
| $ 35,859 | $ 40,970 | 12.9% | 11.3% | 9.2% | 10.8% |
| $ 40,970 | $ 71,719 | 14.2% | 11.7% | 10.1% | 11.9% |
| $ 71,719 | $ 81,941 | 14.8% | 11.9% | 10.6% | 12.5% |
| $ 81,941 | $ 82,342 | 15.7% | 12.2% | 11.2% | 13.3% |
| $ 82,342 | $ 99,987 | 16.2% | 12.4% | 11.6% | 13.7% |
| $ 99,987 | $ 127,021 | 16.9% | 12.6% | 12.1% | 14.3% |
| $ 127,021 | and above | 17.8% | 12.8% | 12.7% | 15.1% |
| BC 2010 Tax Rates | 10% after-tax equivalent | ||||
| Marginal | Cap. | Eligible | SB | ||
| Low Range | High Range | Rate | Gains | Dividends | Dividends |
| $ – | $ 35,859 | 12.5% | 11.1% | 8.9% | 10.4% |
| $ 35,859 | $ 40,970 | 12.9% | 11.3% | 9.2% | 10.8% |
| $ 40,970 | $ 71,719 | 14.2% | 11.7% | 10.1% | 11.9% |
| $ 71,719 | $ 81,941 | 14.8% | 11.9% | 10.6% | 12.5% |
| $ 81,941 | $ 82,342 | 15.7% | 12.2% | 11.2% | 13.3% |
| $ 82,342 | $ 99,987 | 16.2% | 12.4% | 11.6% | 13.7% |
| $ 99,987 | $ 127,021 | 16.9% | 12.6% | 12.1% | 14.3% |
| $ 127,021 | and above | 17.8% | 12.8% | 12.7% | 15.1% |
The following is for an 8% after-tax return:
| BC 2010 Tax Rates | 8% after-tax equivalent | ||||
| Marginal | Cap. | Eligible | SB | ||
| Low Range | High Range | Rate | Gains | Dividends | Dividends |
| $ – | $ 35,859 | 10.0% | 8.9% | 7.1% | 8.3% |
| $ 35,859 | $ 40,970 | 10.3% | 9.0% | 7.4% | 8.6% |
| $ 40,970 | $ 71,719 | 11.4% | 9.4% | 8.1% | 9.5% |
| $ 71,719 | $ 81,941 | 11.9% | 9.6% | 8.4% | 10.0% |
| $ 81,941 | $ 82,342 | 12.6% | 9.8% | 9.0% | 10.6% |
| $ 82,342 | $ 99,987 | 13.0% | 9.9% | 9.3% | 11.0% |
| $ 99,987 | $ 127,021 | 13.5% | 10.0% | 9.7% | 11.4% |
| $ 127,021 | and above | 14.2% | 10.2% | 10.2% | 12.1% |