Taxable Income and Portfolio Settings

In this article, we will go over some of the more detailed information available in the projections for taxable income, and how to view and make adjustments to the investment income generated from non-registered assets.  

Here is a more detailed explanation of the math behind the Taxable Income column described in the Definitions section.

Taxable income includes any employment income, other taxable T4-type income, eligible and non-eligible dividend income, and investment income (including interest, foreign and Canadian dividend income, and capital gains).

First, you can click the blue icon under Taxable Income on the Planning page to see the Taxable Income breakdown. Make sure the Income Tax section is expanded (the arrow in the section header is pointing to the left):

The Taxable Income Details table will pop up.  Note that you can export these details to Excel by clicking the Export icon at the top of the page.  Here is a screenshot of the first few columns of the window that will appear:

Additional details on the included values for each column can be found through the "?" icon.

The Pensions column includes the maximum OAS income the individual could receive. OAS clawback amounts are displayed under the Deductions column.

More formally, Taxable Income is defined as follows:

TAXABLE INCOME =
employment income
+ other taxable income
+ grossed up eligible dividend
+ grossed up non-eligible dividend
+ non-registered investment income that includes interest, foreign dividend, 
  grossed up eligible dividend and taxable portion of capital gains 
+ taxable portion of the annual portfolio re-balancing capital gains 
+ withdrawals from registered assets (RRSP, LIRA, DCPP)
+ taxable portion of capital gains from real assets
+ other (taxable) benefits
- tax deductions
- contributions to registered assets (RRSP, Spousal RRSP, LIRA)
- tax deductible interest on debt.

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Investment income is determined by the entered asset mix for Financial Assets. For example, suppose your asset mix is 10% Cash, 30% Fixed Income and 60% Equity. In that case, you will realize interest income from the 40% of your assets allocated to Cash and Fixed Income and the remaining 60% of investment income will come from the Equity asset class.  This includes dividend income and capital gains, and the Equity Return Allocation can be set on the Portfolio Settings page as shown below. 

To open the Portfolio page, click Scenario Setup -> Settings -> Portfolio. 

Equity is distributed amongst dividend and capital gains producing stocks and the default is 60% Capital Gains, 20% Canadian Dividends and 20% Foreign Dividends as shown above.  The amount of investment income from the Equity asset class will depend on this setting. 

The Annual Portfolio Turnover setting controls how much equity is bought and sold each year to trigger capital gain tax. The default is 5%. Hence, by default, approximately 95% of capital gains are deferred.   Note that more capital gains will be realized if there are withdrawals made from the account and also they may be triggered by automatic portfolio rebalancing as described below.

The portfolio settings apply to all non-registered assets in the projections (except for those modelled in the corporate module if applicable). To adjust the corporate portfolio settings, from the Corporate Planning page, select Scenario Setup -> Settings -> Portfolio.  

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To maintain your asset mix over time, Snap performs automatic portfolio re-balancing each year. At the end of each year, the asset class that grew the most is partially sold and rebalanced into other asset classes to arrive at the specified asset allocation.

Therefore, even if you have entered a non-registered asset with 0% annual portfolio turnover under the Portfolio Settings, the automatic rebalancing may trigger capital gains.  

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