The deadline to file your 2018 income tax return is April 30 for most Canadians, so we’re here to help you figure out what taxes to pay on your investments, if any.
The money you’ll owe is determined by the type of Moka investment account you have. We currently offer non-registered accounts, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).
Not sure what kind of account you have? No problem! Just click on your goal in the Moka app and look directly under the goal name. If you have more than one goal, you have more than one investment account with Moka, so be sure to check all of them.
What taxes do I pay on a Non-Registered Investment Account?
Quick answer: You pay taxes only on the income generated by your investments.
Long answer: You can invest and withdraw as much as you want in a non-registered account. You will only pay taxes on income generated by your investment. There are three different kinds of income to know about.
- Dividends are profits that a company shares with its investors. If you own stock in a company that pays dividends, you earn a certain amount of money for each share of the company that you own.
- Interest is money paid regularly at a particular rate as compensation for lending a company money (i.e. buying bonds). In the case of your Moka account, interest may be paid out from bonds and money market securities.
- Capital gain is the profit you make from selling the holdings in your account. You may see a capital gain or loss following a withdrawal or change of investment model in your Moka account, as in either case, investments may be sold in your account.
There is no penalty for withdrawing from a non-registered investment account, however, please remember you will be taxed on any capital gain arising from this withdrawal. How exactly does that work? Let’s say you deposit $100 in your account. Your money is invested and grows to $105. If you decide to withdraw that $105, you would be taxed on the $5 you made from selling your investment, but only 50% of capital gains count as income.
If you don’t have a non-registered account with Moka, then you have an RRSP or a TFSA. These accounts are registered investment accounts, which means they were set up by the government to provide certain tax advantages as incentives to save and invest. There is a limit to how much you can contribute to TFSAs and RRSPs and there is a different kind of penalty for withdrawing from either account.
What taxes do I pay on a TFSA?
Quick answer: You don’t pay taxes on money in a TFSA.
Long answer: Tax-Free Savings Accounts can be used for saving and investing. As the name suggests, money inside a TFSA is tax-free.
However, there is a limit to how much you can contribute to your TFSA every year. In 2019, the maximum amount that Canadians can contribute to a TFSA is $63,500. Please note that this limit may differ depending on your age and how long you’ve been living in Canada. If you’re not sure how much you can contribute, please speak with a tax professional.
If you exceed your contribution limit, there is a financial penalty. Namely, you’ll owe 1% of the amount you’ve over-contributed every month until you withdraw the excess or become eligible for more contribution room. For example, if you over-contributed $100, you would have to pay $1 per month until you corrected the situation.
You can withdraw money from a TFSA without paying taxes, however withdrawals impact your ability to contribute to your TFSA in the future. How would this happen? Imagine you have already made the maximum contribution for 2019. If you withdrew money to buy something but then decided against the purchase, you would not be able to put that money back in your TFSA in 2019 because you already contributed the maximum amount. However, you can re-contribute that amount in 2020. You can learn more about withdrawing from a TFSA here.
What taxes do I pay on an RRSP?
Quick answer: You pay taxes on any money you withdraw from an RRSP.
Long answer: Think of an RRSP as a tax-deferred account: money grows tax-free until you withdraw it. Any money you withdraw from an RRSP is considered taxable income. When you withdraw the money, our custodian BBS Securities Inc. will automatically withhold some of what you owe in taxes, but you will still have to declare the withdrawal as income that year, and you may be asked to pay additional taxes depending on your marginal tax bracket.
There is also a limit to how much you can contribute to an RRSP every year. If you exceed the contribution limit by more than $2,000 there is a financial penalty. You can contribute the lesser of 18% of your income or the annual contribution limit, which is $26,500 for 2019. To see how much contribution room you have in any given year, get out your Notice of Assessment from the previous year and look for the page that covers RRSPs.
You’ll be able to find all the tax documents you need from Moka at the end of March. Look for your 2018 Trust Income Report in the Accounts Tab under Documents > Annual Documents > Tax Information. If you’ve made over $100 in trust income on your investments, we will also send you a T3 slip.
If you have any questions about how to read tax documents from Moka, please reach out! For further questions about filing your taxes, we strongly suggest you consult a government website or a licensed tax professional.