I have crunched a few numbers to quantify the impact of the drop in capital gains taxes. The drop from 75% to 50% is significant for those that invest in equities outside of RRSPs.

Impact on Retirement Income

The following example shows the impact on producing after-tax income over a 20-year retirement period for a 45-year-old baby boomer.

A baby boomer in the 50% tax bracket invests $1,000 today for 20 years, and averages 10% equity fund returns. She then draws from those funds over the next 20-year retirement period from age 65 to 85. With a 75% inclusion rate, the initial $1,000 investment at age 45 would produce a 20-year after-year income of $405/yr with a 75% inclusion rate, and $492/yr for a 50% inclusion rate. This is a 21% increase.

Impact on Retirement Income

The following example shows the after-tax impact on estate values.

 A baby boomer in the 50% tax bracket invests $1,000 today and averages 10% equity fund returns for 40 years produces produces a net, after-tax estate value of about $21,600 with a 75% inclusion rate, and $27,500 with a 50% inclusion rate. This is a 28% increase.

 The rough benefit for the majority of Canadians who invest for retirement is that the reduced inclusion rate increases the after-tax retirement income produced from unregistered equity funds by approximately 20-25%. The increase in after-tax estate value is about 30%.

 Two other points. It's great for taxpayers that several political parties are competing with each other on the basis of giving the best tax cuts. Let's cheer them on.

 Secondly, the lower tax rates in general and the reduced tax on capital gains raises (again) the issue of whether investors can generate more after-tax retirement income by keeping the equity portion of their portfolio outside of RRSPs.

 Sadly, this issue was not brought up before 1994 when all Canadians could have earned $100,000 of capital gains totally tax-free. Clearly, until this point was reached, equities should have been unregistered. Now the answer is not as straightforward, but the mini-budget changes do make non-registered equity investing more effective than before.

In some cases, Canadians will produce more after-tax retirement income by investing their equity funds outside of RRSPs.

As I have just published a new booklet "Dispelling the Myths of Borrowing to Invest", it should be noted that these tax changes also make leveraged investing more effective than before also.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of www.TalbotStevens.com. For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing judy@TalbotStevens.com.