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Are Interest Income and Capital Gains Taxed the Same Way?

Investments can be taxed in different ways, and if you’re dealing with large sums of money, a lower rate can make a big difference.

Romina Maurino: In terms of tax rates then, if you are getting taxed whether it’s interest, capital gains, is there one that’s better than the other if you have to get taxed?

Raj Vijh: Yes, there is. So capital gains is the most efficient from a tax perspective and interest income would be the least efficient, where you’d be paying the most taxes. So an example would be: let’s say you’ve got $100 as a distribution. If all of that was capital gains, then the first thing that happens is you take about 50 per cent of that and you put it to one side because that’s non-taxable. So you’re only taxable for 50 per cent, so $50. Assuming you pay tax to the highest rate, then at 50 per cent, then you would be taxed 50 per cent of that $50 being $25. So on that $100 of distribution, you pay tax of $25, assuming it’s all capital gain. With interest income, which is at the other end of the spectrum, there’s nothing off the table. That full $100 is taxable and you apply the highest tax rate to that, which is 50 per cent, so now you’ve paid $50 of tax on the $100. You can see that with capital gains, you’re paying $25 and with interest income, you’re paying $50, which is quite a big difference. So as a unit holder, you’d have a preference for capital gains.