Four Ways to Make Money

One of the objectives of investing is to increase the value of your capital; that is, to use your money to earn money by making returns on the initial investment of capital. There are four types of returns on investments:

  1. Interest
  2. Dividends
  3. Capital gains
  4. Rental income

These will be discussed in the sections that follow.

1. Interest

Interest is the income earned on cash and fixed income investments such as bonds.

  • Simple interest is the amount of interest paid or accrued at the end of the term negotiated.
  • Compound interest is the amount of interest paid on the original principal, plus on interest previously earned. 
  • Interest is treated as regular income for income tax purposes.

2. Dividends

Dividends are a share of the profits of a corporation distributed to its shareholders. Dividends can be earned on common and preferred shares. Preferred shares are usually entitled to a fixed dividend, which is either a percentage of the value of the shares or a set amount of dollars and cents. Companies will only pay dividends on common shares once the preferred shareholders have received their dividends.

Dividend income paid by eligible Canadian corporations is granted preferential tax treatment through the dividend gross-up and tax credit. This means you'll pay less tax on eligible dividend income than you will on the same amount of interest income.

3. Capital Gains

Capital gain is the profit resulting from the sale of a capital asset. Capital assets include:

  • Equities (such as company shares)
  • Bonds
  • Real property
  • Art and collectibles

In order to encourage investment, capital gains receive preferential tax treatment: only half of your capital gain is taxed as income.

4. Rental Income

Rental income is the income earned by renting or leasing a residential or commercial property.

  • Net rental income is the amount remaining after all expenses have been paid.
  • Gross rental income is reduced by out-of-pocket expenses; net rental income is added to income and taxed.