I think it's problematic to think of it as a negative tax rate. That's like saying that getting an income tax return in April means that you paid no/negative income taxes in the year before. The apparently negative tax rate comes from overpaying of tax before the money got to you. From your share of the company's profits, you were only paid ~72.5% of it (from 1/1.38). The remaining ~27.5% acts as if it was a payroll withholding tax. But it's worse, the tax rules only credit you for the combined dividend tax credit (~25% Ontario) rather than the full 27.5%. So 2.52% is just lost to double taxation with nothing to show. The split between the ~25% combined dividend tax credit and your marginal tax rate determines if you get a refund or have to pay more taxes. If 25% was an overpayment (you get a tax credit) or an underpayment (you need to pay more taxes). Only in the lowest brackets is the marginal rate such that it was an overpayment.
Mmmm, yes, I understand your point from a technical perspective however I think it’s still relevant to highlight the special tax treatment of Canadian eligible dividends especially versus other types of investment income like foreign dividends. Foreign dividends would have similar corporate tax (perhaps higher or lower depending on the jurisdiction) yet no personal tax benefit for Canadians. Understanding the personal tax implications of different types of retirement income may help people also understand the impact on their personal situation, asset location, government benefits etc.
Good question! Federal and provincial taxes are calculated separately and then added together at the end. So there is a federal gross up and a provincial gross up but they happen independently and not at the same time.
One thing to note is the examples you shared only apply to scenarios with Fully dividend income. For example if we use any tax calculator, earning $110k in Ontario: if you plug 100k employment income + 10k capital gains, then total tax is $28,056 if you plug 100k employment income + 10k eligible dividends, then total tax is $28,294 You are actually paying more tax on dividend income than regular capital gains.
When you say lowest tax bracket - do you mean how much income (job salary) someone has, and which tax bracket they're in? or, nothing to do with their own personal income? So if someone makes 50K, they get the same low tax bracket for the canadian dividend stocks as someone who's making 150K/year?
My question related to a DRIP account comprised to entirely Canadian eligible dividends. Let's say I have $100,000 earning dividends at an annual average of 5%. Come tax year, will I have to sell some of those shares, potentially triggering a capital gains/loss calculation in order to pay my taxes or is there a provision to avoid that?
Any dividends would be taxable in the year, regardless if they are reinvested through DRIP, so unless you have other cash flow that can be used to pay the tax on the dividends, then yes, you would need to sell some shares each year to pay tax on the dividend income. Selling shares will trigger capital gains/losses based on your adjusted cost base vs sale price.
Thank you so much for the video. on top of the given example in the video, if I have T4 income of 100K, can the negative dividend tax credit (-$6.86) deduct the tax on T4 income?
In a sense, but it’s important to clarify that tax deductions and tax credits work differently. A tax deduction lowers the amount of taxable net income on the tax return (the amount used to calculate the tax owing). A tax credit lowers the tax owing. The dividend tax credit reduces the tax owing, it doesn’t matter what type of income generated that tax.
@@planeasy Great to know! if this is the case, by investing some eligible canadian dividend stocks with certain amount, I am not paying any tax on the dividend PLUS pay less tax on my other incomes if I am not mistaken. This is a great way of receiving some dividends and save some tax at the same time :-) a BIG THANK-YOU!
Thank you for the informative video. If you make $350,000 in a professional corporation in B.C., then pay your corporate tax, then use $45,000.00 on your T1 as a dividend rather than salary, does that mean that you pay zero personal tax ? Thank you.
Hi Brad, I cannot comment on your specific tax situation, and I would recommend speaking with your accountant, it will depend on a number of factors such as the type of dividend being paid, if there is other income, what tax credits you’re eligible for etc.
Could you do an analysis of accelerated RRIF meltdown into dividend paying ETF's to determine tax saving over a period of time. Let say a couple with 35k CPP/OAS income and 1M RRIF age 65. Model min withdrawals vs accelerated withdrawals and depositing the proceeds into dividend stocks. My estimate is there won't be enough years to come out ahead.
That’s an interesting idea! I will do that. I suspect there are some “soft” benefits to a faster RRSP/RRIF drawdown that could make it appealing as well, even if tax wise it’s similar, like less estate tax and/or a reduced risk of having a “monster” RRIF if a partner were to pass away and RRIFs were combined.
Canadian dividends can get you clawed back on your OAS as the grossed up amount is taken. That's if your gross income was over around $87,000 last year. You might have one or two good years and then its curtains for the stock market for the next couple of decades starting in 2026.
Thanks for the video! I have income from employment and am worry dividends will push me to a much higher tax bracket. Is there any tax advantages to holding dividend paying stocks in a corporation? Thanks
When you own a corporation that has retained earnings that adds an additional layer of complexity to the planning, more opportunities but also more complexity There are many tax implications when investing inside a corporation so my recommendation would be to speak to an advice-only planner who specializes in this type of work. They can probably find even more opportunities you’re not even considering.
I'll stick to long term corporate bonds, GIC's and precious metals. Like 1929 and 1873 the stock market is far too risky for me and the chances of a 80+ percent meltdown or implosion are very real if the markets correct to fair market value.
I believe what you have done here is incorrect as I just attempted to do what you said this tax year 2022 and it did not work! The federal and provincial amounts ARE NOT combined into a percentage. The federal portion of taxes is about 15%, and the dividend tax credit is the same, so the taxes are negated. On the provincial side here in BC the provincial taxes are 5.06% and the provincial dividend tax credit is 12% so you are left with a negative tax here. But if you do what you said, pull RRSP money out, you will be taxed at the Federal level on it because there is no negative tax on that side of the equation!!!!
Hi Ren, thanks for the comment, in the example we assume there is other retirement income from CPP and OAS that is using up non-refundable tax credits. So by earning Canadian eligible dividends vs foreign dividends this helps lower tax on that other income and allows for a small RRSP withdrawal to be made to bring total tax back to the same level. If there was no CPP or OAS income, and only Canadian eligible dividend income, then yes, the scenario you described would be accurate. Every situation is different. When doing this type of tax planning it is important to look at the overall picture and include other sources of retirement income.
The article assumes there is other income, this could be CPP or OAS but it could also be other income like employment income, RRSP/RRIF withdrawals, pension income, capital gains, foreign dividends etc. That other income incurs tax. The dividend tax credit helps reduce the total tax that would other wise be payable, which in turn provides room to make an RRSP withdrawal and end up paying the same overall amount of tax.
I had other employment income. When I pulled $2000 from my RRSP I was fully taxed at the Federal Level and paid nothing at the Provincial level. So you addition of % of Fed Div Tax to % of Prov Div Tax credit DOES NOT WORK...you are feeding people incorrecty information unless you can demonstrate mathematically otherwise here
If you’re not retired and still earning employment income then it’s a bit more complicated because you are eligible for refundable tax credits like the Canada Workers Benefit which has a clawback rate of 15%. The extra grossed up dividend income and RRSP income can trigger clawbacks. But if your employment income is beyond the clawback range then you’ll still get the benefit of the dividend tax credit. You can use this tax calculator to run scenarios for BC… www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm Scenario 1: $35,000 employment income $3,593 tax Scenario 2: $35,000 employment income $5,000 eligible dividend income $2,000 RRSP withdrawal $3,562 tax Scenario 2 has $7,000 more income, but less tax.
I calculated when over 130K captial gain is more favor than eligible dividend?
I think it's problematic to think of it as a negative tax rate. That's like saying that getting an income tax return in April means that you paid no/negative income taxes in the year before.
The apparently negative tax rate comes from overpaying of tax before the money got to you. From your share of the company's profits, you were only paid ~72.5% of it (from 1/1.38). The remaining ~27.5% acts as if it was a payroll withholding tax. But it's worse, the tax rules only credit you for the combined dividend tax credit (~25% Ontario) rather than the full 27.5%. So 2.52% is just lost to double taxation with nothing to show. The split between the ~25% combined dividend tax credit and your marginal tax rate determines if you get a refund or have to pay more taxes. If 25% was an overpayment (you get a tax credit) or an underpayment (you need to pay more taxes). Only in the lowest brackets is the marginal rate such that it was an overpayment.
Mmmm, yes, I understand your point from a technical perspective however I think it’s still relevant to highlight the special tax treatment of Canadian eligible dividends especially versus other types of investment income like foreign dividends.
Foreign dividends would have similar corporate tax (perhaps higher or lower depending on the jurisdiction) yet no personal tax benefit for Canadians.
Understanding the personal tax implications of different types of retirement income may help people also understand the impact on their personal situation, asset location, government benefits etc.
does canadian ETF's.dividends (example XEI) is it treated the same way as a CDN company dividends?
shouldnt the percentange of gross up be 76m ( 38 x 2) which combines the federal and ontario ?( 100 x 76+100)
Good question! Federal and provincial taxes are calculated separately and then added together at the end. So there is a federal gross up and a provincial gross up but they happen independently and not at the same time.
@@planeasySo what if they are done separately they are still added up.
One thing to note is the examples you shared only apply to scenarios with Fully dividend income.
For example if we use any tax calculator, earning $110k in Ontario:
if you plug 100k employment income + 10k capital gains, then total tax is $28,056
if you plug 100k employment income + 10k eligible dividends, then total tax is $28,294
You are actually paying more tax on dividend income than regular capital gains.
When you say lowest tax bracket - do you mean how much income (job salary) someone has, and which tax bracket they're in? or, nothing to do with their own personal income? So if someone makes 50K, they get the same low tax bracket for the canadian dividend stocks as someone who's making 150K/year?
Your tax bracket is based on all your income (employment and investment added together).
My question related to a DRIP account comprised to entirely Canadian eligible dividends. Let's say I have $100,000 earning dividends at an annual average of 5%. Come tax year, will I have to sell some of those shares, potentially triggering a capital gains/loss calculation in order to pay my taxes or is there a provision to avoid that?
There don’t be any tax unless you withdraw I think …
Any dividends would be taxable in the year, regardless if they are reinvested through DRIP, so unless you have other cash flow that can be used to pay the tax on the dividends, then yes, you would need to sell some shares each year to pay tax on the dividend income. Selling shares will trigger capital gains/losses based on your adjusted cost base vs sale price.
Thank you so much for the video. on top of the given example in the video, if I have T4 income of 100K, can the negative dividend tax credit (-$6.86) deduct the tax on T4 income?
In a sense, but it’s important to clarify that tax deductions and tax credits work differently. A tax deduction lowers the amount of taxable net income on the tax return (the amount used to calculate the tax owing). A tax credit lowers the tax owing.
The dividend tax credit reduces the tax owing, it doesn’t matter what type of income generated that tax.
@@planeasy Great to know! if this is the case, by investing some eligible canadian dividend stocks with certain amount, I am not paying any tax on the dividend PLUS pay less tax on my other incomes if I am not mistaken. This is a great way of receiving some dividends and save some tax at the same time :-) a BIG THANK-YOU!
Great video, thank you
Thanks for watching @LukeJamesLewis
I think it's wrong in the video - the tax before credit should be $100 instead of $138 with gross up amount....
Thank you for the informative video. If you make $350,000 in a professional corporation in B.C., then pay your corporate tax, then use $45,000.00 on your T1 as a dividend rather than salary, does that mean that you pay zero personal tax ? Thank you.
Hi Brad, I cannot comment on your specific tax situation, and I would recommend speaking with your accountant, it will depend on a number of factors such as the type of dividend being paid, if there is other income, what tax credits you’re eligible for etc.
Yes but you'd get hit with the alternate minimum tax. They just raised the alternate minimum tax a lot for the 2022 tax year.
So confusing.
Almost feels like it’s intentional :)
@@planeasy My thoughts exactly. ;)
Could you do an analysis of accelerated RRIF meltdown into dividend paying ETF's to determine tax saving over a period of time. Let say a couple with 35k CPP/OAS income and 1M RRIF age 65. Model min withdrawals vs accelerated withdrawals and depositing the proceeds into dividend stocks. My estimate is there won't be enough years to come out ahead.
That’s an interesting idea! I will do that.
I suspect there are some “soft” benefits to a faster RRSP/RRIF drawdown that could make it appealing as well, even if tax wise it’s similar, like less estate tax and/or a reduced risk of having a “monster” RRIF if a partner were to pass away and RRIFs were combined.
Canadian dividends can get you clawed back on your OAS as the grossed up amount is taken. That's if your gross income was over around $87,000 last year. You might have one or two good years and then its curtains for the stock market for the next couple of decades starting in 2026.
@@parkerbohnn Why 2026?
Thanks for the video! I have income from employment and am worry dividends will push me to a much higher tax bracket. Is there any tax advantages to holding dividend paying stocks in a corporation? Thanks
When you own a corporation that has retained earnings that adds an additional layer of complexity to the planning, more opportunities but also more complexity
There are many tax implications when investing inside a corporation so my recommendation would be to speak to an advice-only planner who specializes in this type of work. They can probably find even more opportunities you’re not even considering.
I'll stick to long term corporate bonds, GIC's and precious metals. Like 1929 and 1873 the stock market is far too risky for me and the chances of a 80+ percent meltdown or implosion are very real if the markets correct to fair market value.
I believe what you have done here is incorrect as I just attempted to do what you said this tax year 2022 and it did not work! The federal and provincial amounts ARE NOT combined into a percentage. The federal portion of taxes is about 15%, and the dividend tax credit is the same, so the taxes are negated. On the provincial side here in BC the provincial taxes are 5.06% and the provincial dividend tax credit is 12% so you are left with a negative tax here. But if you do what you said, pull RRSP money out, you will be taxed at the Federal level on it because there is no negative tax on that side of the equation!!!!
Hi Ren, thanks for the comment, in the example we assume there is other retirement income from CPP and OAS that is using up non-refundable tax credits. So by earning Canadian eligible dividends vs foreign dividends this helps lower tax on that other income and allows for a small RRSP withdrawal to be made to bring total tax back to the same level.
If there was no CPP or OAS income, and only Canadian eligible dividend income, then yes, the scenario you described would be accurate.
Every situation is different. When doing this type of tax planning it is important to look at the overall picture and include other sources of retirement income.
Please elaborate. I am not taking CPP or OAS and took $2000 out of my RRSP because of your article after a year of planning!!
The article assumes there is other income, this could be CPP or OAS but it could also be other income like employment income, RRSP/RRIF withdrawals, pension income, capital gains, foreign dividends etc. That other income incurs tax. The dividend tax credit helps reduce the total tax that would other wise be payable, which in turn provides room to make an RRSP withdrawal and end up paying the same overall amount of tax.
I had other employment income. When I pulled $2000 from my RRSP I was fully taxed at the Federal Level and paid nothing at the Provincial level. So you addition of % of Fed Div Tax to % of Prov Div Tax credit DOES NOT WORK...you are feeding people incorrecty information unless you can demonstrate mathematically otherwise here
If you’re not retired and still earning employment income then it’s a bit more complicated because you are eligible for refundable tax credits like the Canada Workers Benefit which has a clawback rate of 15%. The extra grossed up dividend income and RRSP income can trigger clawbacks.
But if your employment income is beyond the clawback range then you’ll still get the benefit of the dividend tax credit. You can use this tax calculator to run scenarios for BC…
www.taxtips.ca/calculators/canadian-tax/canadian-tax-calculator.htm
Scenario 1:
$35,000 employment income
$3,593 tax
Scenario 2:
$35,000 employment income
$5,000 eligible dividend income
$2,000 RRSP withdrawal
$3,562 tax
Scenario 2 has $7,000 more income, but less tax.