Investing for dummies: what are the basics? | General financial discussion | Discussion forum

Given the capital gains requirement by CRA on most investments, is it always worthwhile to play the "market" assuming one has a lower rate of return, say 2% compared to investing in a GIC?

Or should potential investors hope their investments will yield higher than the current interest rates at financial institutions to offset any capital gains?

If you have limited experience and want to better understand how to invest your money, it is probably worthwhile to start off reading a basic investing book such as "Investing for Dummies" to understand the basic financial concepts and terminology.

To answer your specific question ... it depends !

What investment you decided on will depend on a many factors such as:

Your risk tolerance, the investment term, expected rate of return, and your MARGINAL TAX Rate .. ( not AVERAGE tax rate).

For a very "simple/basic" example:

Invest in a $100K 5% GIC for 5 years = $5,000 interest yearly.
and if your Marginal Tax rate is 20% = $1000 tax paid yearly.
or if your Marginal Tax rate is 50% = $2,500 tax paid yearly.
Alternately
Invest $100K in the market with yearly 5% return = $5,000 capital gain yearly.
and if your Marginal Tax rate is 20% = (1/2 of $5,000) $500 tax paid yearly.
or if your Marginal Tax rate is 50% = (1/2 of $5,000) $1,250 tax paid yearly.

What Is the Marginal Tax Rate? The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.

You can see from this example that a person with a higher Marginal Tax Rate pays significant more in tax and has a lower real rate of return investing in a GIC verses the "market" . However, the "market" risk is higher since the GIC has a guaranteed rate.

However, if you "limited funds" to invest you can take advantage of using a TFSA to avoid all tax on your GIC investment. As of January 1st 2023, anyone over the age of 18 in 2009 will have $88,000 of TFSA contribution room if they've never contributed before!