Comments on: How Investing Taxes Work (Part 2 – Dividends and Interest)

By: FrugalTrader

FrugalTrader — Thu, 12 Jan 2012 01:57:41 +0000

@Yoree, if the companies are Canadian, then yes, you would not have to pay any tax on them. However, if they are from a foreign country, then there will be a withholding tax. I keep all foreign dividends within an RRSP to bypass the withholding tax.

By: Yoree

Yoree — Thu, 12 Jan 2012 01:07:01 +0000

Would keeping investments inside of TFSA give you a tax free status for dividends that companies pay you?

By: FrugalTrader

FrugalTrader — Mon, 28 Nov 2011 19:14:04 +0000

@James, if it is truly income from interest (bonds/gics/money market/savings accounts), then it is taxed at your marginal rate. If it’s publicly traded dividends in a non-registered account, then you’re eligible for the dividend tax credit.

By: James

James — Mon, 28 Nov 2011 19:07:07 +0000

My accountant is away so I’m hoping you can help me with an Interest Income question. I was under the impression that there is a tax credit that actually brings the effective tax rate down substantially on Interest Income.

i.e – $100 of interest income is initially taxed at 43.7% but after tax credit the effective rate is closer to 26-28%, for a net gain of $72-$74?

Has anyone heard of this?

By: Stephen

Stephen — Sat, 19 Feb 2011 19:23:24 +0000

Great article.

I’ve got a question. It was calculated that the total tax payable on $1000 worth of dividents comes to $181.88

What do you do with this $181.88 amount? Do you go back to step one, and now instead of adding $1450 to $55K, you add $181.88 now?

By: Kevin

Kevin — Thu, 13 Jan 2011 01:06:14 +0000

@FrugalTrader:

Right, of course, but that’s true of ANYTHING you hold in your RRSP, and is not unique to interest-earning instruments. Thus, I’m still not sure why you consider interest-bearing instruments to be particularly well-suited to being held in an RRSP, that’s all I mean.

Like I said, TFSA’s are a much more efficient shelter in which to hold interest-income instruments, because you’re taking income that would otherwise be taxed at 100% (whether held within an RRSP or in an unregistered account), and reducing its taxation to 0%. You’re saving 100% of the tax.

I mean to contrast this with, for example, capital gains, which attract 50% taxation in an unregistered account, 100% taxation within an RRSP, and 0% taxation within a TFSA. In this case, you’re saving 50% of the tax (compared to saving 100% of the tax for interest-income items). Thus, it could be argued that interest-bearing instruments are better suited to TFSA’s than RRSPs.

By: FrugalTrader

FrugalTrader — Wed, 12 Jan 2011 14:05:57 +0000

@Kevin, you are correct, but one thing you are missing is the taxation of the contribution amount. With RRSPs, you are investing with PRE-tax dollars (ie. gross income) providing that the tax refund is reinvested, whereas the TFSA, you are investing with after tax dollars (net income).

By: Kevin

Kevin — Wed, 12 Jan 2011 13:57:47 +0000

I’m unclear on why holding interest income in an RRSP is favourable. You indicated that interest income is fully taxable, 100% as regular income.

Withdrawals from an RRSP are … wait for it … fully taxable, 100% as regular income.

So what’s the advantage?

This article was written in 2007, before the TFSA, but now that TFSA’s are available, doesn’t it make much more sense to hold interest income in a TFSA, where it’s not taxed at all, rather than inside an RRSP, where it’s taxed 100% as regular income (just as it would be OUTSIDE of an RRSP)?

By: David

David — Wed, 08 Dec 2010 16:57:56 +0000

I mean besides the fact that ETFs can reduce capital gains
Is the income from bond index funds considered as interest or dividents

By: David

David — Wed, 08 Dec 2010 16:46:32 +0000

Thank you for your replay

are bond ETFs different from bond index funds in terms of taxes?

thanks again

By: FrugalTrader

FrugalTrader — Wed, 08 Dec 2010 16:14:51 +0000

Actually, a better answer is to visit the website of the ETF and check out their distributions. It’s believe bond etfs can distribute ROC as well, but not certain.

By: FrugalTrader

FrugalTrader — Wed, 08 Dec 2010 16:08:04 +0000

@David, if it’s a bond ETF, then the distributions will be in the form of interest.

By: David

David — Wed, 08 Dec 2010 15:36:42 +0000

Hi everybody

As I know we pay 100% tax on the interest income received from bonds.

What if I invest in bond index funds or bond index tracking ETFs
Will my income taxed as interest or as dividends?
If invest in bond index funds or bond index tracking ETFs will I be eligible for dividend tax credit?

Thank you all in advance

By: Former High-tech Worker

Former High-tech Worker — Tue, 03 Aug 2010 18:40:44 +0000

Be VERY careful of assertions like “you can receive up to $48,900 in dividends and pay NO federal tax”. Your provincial tax may bite you. If you live in Ontario, _no matter how old you are_, you will be dinged for more “Health premium”. After the High-tech layoffs, when I needed to live off my investments, I discovered that with only $16K in real dividend income, because of the gross-up I was both paying income tax (at a marginal rate of 37%), AND I had dividend tax credits I could not use. Anyone living in Ontario (or advising people living in Ontario), should take note. (Hint hint, to all the Alberta-resident tax experts.)

By: Cristian

Cristian — Sun, 18 Jul 2010 22:52:43 +0000

Thank you FrugalTrader for your input.
That is what I pretty much suspected, I just didn’t know where to look for this information.
So dividends received by a corporation are taxed at the maximum rate (like interest income), and then the dividend tax credit is applied.
I hope I got it right.

Thanks,
Cristian

By: FrugalTrader

FrugalTrader — Sun, 18 Jul 2010 22:23:48 +0000

Ok, after reviewing that document, I believe the conclusion is that dividends received within a corporation is taxed with a “part iv” tax which makes it basically the highest possible tax rate. However, it is refundable once the dividend is distributed to shareholders.

By: FrugalTrader

FrugalTrader — Sun, 18 Jul 2010 16:22:12 +0000

Here is an article that explains dividends within a corporation:

https://hermes.manulife.com/canada/repsrcfm-dir.nsf/Public/TaxTopicCorporateTaxation/$File/tepg_taxtopic_CorpTax.pdf

My understanding as well is that public dividends received within a corporation can be “flowed through” to shareholders and taxed in the hands of the shareholder instead of the corporation. But again, a tax pro should be consulted for the details.

By: Cristian

Cristian — Sun, 18 Jul 2010 15:06:26 +0000

Actually I was talking about dividends earned by the corporation. I do pay myself personally dividends from the corporation and I pay almost no taxes on that.
But I was wondering how are dividends earned by the corporation taxed. I know that interest is taxed at the maximum corporate rate (almost 50%), capital gains are taxed at half of that (because the other half is exempt), but it is not clear how dividends are taxed inside the corporation. I know that there is a gross-up of 45%, after which the tax is calculated (but how?), and then the dividend tax credit is applied.
Any ideas on this?…
Thank you,
Cristian

By: FrugalTrader

FrugalTrader — Sun, 18 Jul 2010 14:25:24 +0000

@ Cristian, the corporation will face it’s own tax like you mentioned. However, once you withdraw the money from the corp in the form of a dividend, the shareholder will face personal tax. You can read more from a past article on how it works:
http://www.milliondollarjourney.com/private-canadian-corporations-and-taxes-scenarios.htm

By: Cristian

Cristian — Sat, 17 Jul 2010 22:01:41 +0000

How are dividends received by a corporation taxed?
I am an incorporated physician and I invest mainly through my corporation. The current corporate tax rate (small companies) is 13.5%.
How would that apply to the calculation of dividend tax?

Thanks,
Cristian