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Do Canadian dividend mutual funds offer the most tax advantages?

Dividends paid by Canadian companies qualify for the dividend tax credit. If your mutual fund holds these kinds of investments, you would benefit from that tax break. Dividend income is taxed at a lower rate an interest income.

However, some dividend funds hold bonds, producing interest income that doesn't qualify for that special tax treatment. In fact, more than half of Canadian dividend funds are likely to hold bonds in their portfolios, some allocating up to 20 percent to them.

Check whether there are bonds in the portfolio of the fund you are considering buying. This will give you some idea of the amount of interest income you might have to pay.

For people with a low risk tolerance, but who want some exposure to equities, dividend funds might be the answer. These funds aim to provide income from dividends, either monthly or quarterly. These funds are often viewed as an alternative to bond funds, albeit riskier alternatives. The funds invest mostly in common shares of large established companies that pay higher than average dividends and are therefore less risky investments. They also invest in preferred shares of Canadian companies.