In the article “How Investing Taxes Work – Part 2 Dividends and Interest”, I suggested that dividend income should be kept OUTSIDE your registered account due to the dividend tax credit that you receive. This is not entirely true. Here is a quote from a financial expert, Norbert, on FinancialWebRing:
… the RRSP will still be better for dividend payers if you are in a tax bracket where the marginal rate on dividends is > 0. In most provinces, that means you have to be in the second bracket, i.e. have a taxable income over $35k. In BC, which did the right thing by its dividend collectors, you have to be in the third bracket (taxable income over ~$70k) before there is much advantage from using the RRSP to catch dividends.
Currently, it is more efficient to keep your dividends outside your registered account ONLY if you are a low income earner (except BC). How low do you ask?
Below is a table that I created by province and maximum income earned before it is more efficient to hold your dividend paying assets inside your RRSP. Also note that your dividend income is grossed up by 45% which is then added to your employment income to figure out your marginal rate and whether or not you fall under the maximum income. Mind you that these numbers are based on tax law today and probably won’t be the case in a couple years with our ever changing tax landscape.
Updated Aug 2009
|QU||taxed from $1|
For me personally (in Newfoundland), as it stands right now, it would be more efficient for me to keep my dividends INSIDE my RRSP. With my growing employment income even the enhanced dividend tax credit will not beat the tax free growth offered by my RRSP. If you look at the table, it’s apparent that anyone investing in dividends should move to BC. :) In BC, you can earn up to $71,433 in employment income + grossed up dividends before you pay ANY tax on your dividend income.
Are you confused yet? To be completely honest, I’m a little fuzzy headed right now too! As you can probably tell, I’m the type of person who seeks to OPTIMIZE everything. This analysis is tricky as there are many variables to consider, like if I wanted to retire early, or if I started a business, or if my wife decides to become a stay at home mom. Each one of these scenarios should be planned differently.
It is most efficient for high income earners (check table) to keep their dividends INSIDE their RRSP and for low income earners to keep their dividends OUTSIDE their RRSP. As a side note, it may not be the best strategy for a low income earner to even use an RRSP but that analysis is for another day.
If you would like to do your own tax calculations, go to taxtips.ca, choose your province, then select the “Tax and RRSP Savings Calculator”.
That’s all for now! Have a happy Monday!If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).