Let’s
say you invest $100,000 in an equity or equity index fund at $10 per unit
which grows by 10 percent in year one and that is the amount you plan to
withdraw. It would appear that a $10,000 capital gain will be realized the
sale of the units, but this is not the case.
The actual realized gain is the difference between the purchase price of
$10 and the current market value of $11 or $1 per unit. You need to redeem
909 units to generate $10,000. Thus 909 x $1 or $909 is your gain. Under
the current tax law, 50% of that gain is taxable. That’s $455. Assuming
you have to pay the average top marginal tax rate of 50%, your total tax
exposure for income of $10,000 per year is a mere $228.
Contrast that with a GIC. Assuming you’re in the top bracket, the annual
tax hit on income of $10,000 is a staggering $5000. And here’s another
benefit. As you won’t have as much reportable income while still maintaining
your cash flow, you will minimize or eliminate the clawback of your Old Age
Security benefits. Add to this a guarantee of the return of up to 100% of
your capital at maturity or death, less withdrawals and you have a great
income plan for at least part of your capital.
