Saturday, April 28, 2007

Dividend Tax Rate

After completing my income tax I used QuickTax to do a few "What If?" calculations.

I currently have no direct income from dividends but I expect to get into that as time goes on. My current marginal tax rate is 21 percent. This means that if I was to earn money from employment or have additional interest income, I would pay $21 tax on the first $100.

I knew that dividend income had a better tax rate. Both the federal and provincial levels of government in Canada want investors to buy shares in companies that pay dividends so they give "tax credits" for any dividend income. A tax credit is code for a lower tax rate. Companies that pay dividends include the major banks such as TD Bank, Bank of Montreal, Royal Bank and so on.

I added several amounts of additional dividend income on Schedule 4, line 2, to see how much additional tax I would pay. The results are interesting.

$100, $4 additional tax , 4 % tax rate
$500, $28 additional tax, 6 % tax rate
$1000, $58 additional tax, 6 % tax rate

The 2006 tax rate for the additional dividend income is only 4-6 percent. This is quite low relative to my 21 % marginal tax rate for other types of additional income.

Sweet!

ps: I will be away for about a week so I will not be posting.

Update, May 7th

I went back and tried adding "eligible dividend" income in line 6 of schedule 4. In this case, believe it or not, I would actually pay less tax than I do without the additional income. The combined federal and provincial tax credits exceed my marginal tax rate. For example, if I had $1,000 in additional "eligible dividend" income I would pay $97 less income tax!

14 comments:

Mike said...

I don't get it, if the marginal rate is 21% then why doesn't the tax go up 21% for every $100 of div income?

moneygardener (AKA investor99) said...

Canadian Money,

I have added your blog to my blogroll at

http://themoneygardener.blogspot.com/

Hope this is ok. I enjoy reading your blog, and I wanted to direct others to it.

Canadian Money said...

Mike

Dividend income is given "special tax treatment". If one has dividend income they pay less tax than they would for additional income from employment or interest income. The details include a gross up calculation followed by a tax credit from both the federal and provincial governments. I guess the government is trying to encourage people to invest in dividend paying stocks.

MG

Glad you enjoy my blog. Thanks for adding mine to your blog roll. I will check out yours.

CM

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