Passive income is the income you receive on regular basis with little effort required to maintain it. Interest income, Dividends income and rental income are considered as passive income.

When you invest your money in Guaranteed Income Certificates, Promissory notes, Bonds or Treasury Bills your earnings will be in the form of interest. From Income Tax Act’s point of view all interest income is considered earned income like salaries or wages. Salaries, wages and interest income are usually taxed at a higher rate.

Distribution of Corporation’s after tax income to its shareholders is called Dividends. Preferred Shareholders will get special consideration in comparison to Common Shareholders. Also preferred Shareholders will have predetermined dividends payment.  Depending on which province you live in, you can have up to $50,000 in the form of dividends and absolutely tax free.

Investments in real estate, stocks and bonds when sold at profit generate Capital Gains Income. For example if you buy 1000 shares of ABC company at $10 each and later sell these at $ 20 per share, your capital gains income will be $10,000. 50% ($5,000) of your capital gains income is subject to capital gains tax. The tax rate for capital gains equals at individual’s tax rate. Personal residence is not subject to capital gains tax.

It is always a good idea to move your interest earning investments to dividend paying investments. This can save you a lot in taxes.

Section 148(3) of the income tax law allows to invest in Tax Exempt Life Insurances. The growth in such kind of insurance policies is very similar to RRSP. Many investors use tax exempt insurance as an additional way to carry on tax deferred growth. Proceeds from such insurance policies are distributed to taxpayer’s estate or beneficiaries absolutely tax free.