How to earn $50,000 in dividend income tax-free (in most provinces)

The Financial Post has just published (in Thursday’s paper and online) my article headlined “You can earn $50K in tax-free dividends but there’s a catch: You can’t have a job.”

Can’t have a job, indeed, or a large pension or any other source of significant alternative income.

The article is based on a BMO Financial Group report (May 2016) entitled Eligible Dividend Income. It shows that at least eight provinces or territories make it possible to receive $51,474 a year in “tax-free” eligible dividend income, provided there are no other major sources of income, and notwithstanding any provincial health levies.

These include Alberta, British Columbia, New Brunswick, Ontario, Saskatchewan, the Northwest Territories, Nunavut and Yukon. It’s only $45,309 in Prince Edward Island, $35,835 in Quebec, $30,509 in Nova Scotia, $24,271 in Manitoba and just $18,679 in Newfoundland and Labrador.

BMO won’t update for 2017 until all 2017 provincial budgets are released. When it first began publishing the document for the 2012 tax year, the maximum amount of tax-free income on eligible dividends was $47,888 in Ontario and eight other provinces. The amount rose to $48,844 in 2013 and to $49,284 in 2014.

Dividend Tax Credit, Basic Personal Amount are keys

This low-tax phenomenon happens through a combination of the Basic Personal Amounts (which in 2016 makes the first $11,474 tax-free federally) and the 15.02% federal dividend tax credit on eligible Canadian dividends: once you “gross up” your eligible dividend income by 38% (required when you file your annual taxes), the non-refundable dividend tax credit kicks in, reducing taxes owing. (Your T-5 slip will indicate if the dividend is eligible or non-eligible). There are also provincial dividend tax credits: in Ontario since 2014 it has been 10% of the grossed-up dividend.

to really benefit from all this – even assuming no other large sources of income – you really have to be in the lower tax brackets. According to this site at TaxTips.ca, the tax rate (combined federal/Ontario) on eligible Canadian dividends in 2016 was actually minus 6.86% on the first $41,536 of such income. Between $41,536 and $45,282 the tax rate is minus 1.2%. John Waters, Vice-President, Director of Tax Consulting Services for BMO Wealth Management,  says that merely shows the power of the dividend tax credit at lower tax rates exceeds the lowest marginal tax rates.

Those tax rates are much less than the capital gains rate of 10.03% and 12.08% in those first two brackets. Between $45,282 and $73,145 the tax rate on eligible Canadian dividends is still a modest 6.39% (compare to 14.83% for capital gains in that bracket, and a whopping 29.65% for interest or other income in that bracket.) From there, the combined tax rate on eligible dividends steadily rises, reaching as high as 39.34% for those making $220,000 or more in Ontario.

Investors dodged bullet in budget but tax pros apprehensive on what may come next

The piece closes with a mention of the recent federal budget and what investors might expect from the Liberal government in the next couple of years of its term. This is explored fully in my latest Motley Fool blog linked here, and which ran on Monday: Business owners, investors and seniors dodge bullet in recent budget. 

 

4 thoughts on “How to earn $50,000 in dividend income tax-free (in most provinces)

  1. Jon,

    There are 3 big disadvantages of investing for dividends:

    1. It tends to force you into a horrible “home bias” portfolio that is essentially a resource and bank sector fund.
    2. Dividends are all taxable this year, while capital gains can usually be deferred many years.
    3. With capital gains, you are in control and can plan the best time to claim capital gains. With dividends, the companies make the decisions and you have to pay tax on their dividends every year.

    Dividend investing is a subsset of equity investing. Instead of choosing the best companies for growth and fundamentals all over the world, you choose those that pay out bigger divdiends and are in Canada.

    Equity investors with a broad, globally diversified portfolio and can usually take $50,000/year or more in cash flow with zero tax as well. They receive a mix of principal and capital gains, with much of the gains being deferred.

    I call this “self-made dividends” and they are better than ordinary dividends IN EVERY WAY. Less tax, you set the dividend, you change it any time. you buy the best companies based on fundamentals, you can globally diversify, and seniors are not nailed by clawbacks on grossed-up dividends. More detail here: https://edrempel.com/self-made-dividends-dividend-investing-perfected/ .

    We are in a “dividend bubble” with investors over-paying for dividends. I have come across more than 100 blogs devoted entirely to dividend investing.

    There is no specific advantage of dividend investring. Broad equity investors that invest for growth and then just sell a bit each month when they need cash flow are better off than dividend investors in every way.

    Ed

  2. I am intrigued by the comment made by Ed Rempel. His comments, seem to completely contradict what so many experts have been promoting, which is dividends, dividends, dividends Many have recommend seniors (especially those who do not have company pensions) should live off dividend income and not touch their capital as long as possible, or maybe ever.

    As an almost-senior, what I am starting to realize is that having all dividend income and a healthy RSP which I plan to convert into a RIF when I turn 65 will become a huge income tax burden for me. (The RSP is also invested in dividend growth stocks, 20% Can, 80% US.)

    I encourage you to provide some new articles further explaining alternate ways to fund retirement, such as that suggested by Ed Rempel. .

  3. Dividends can be a good way to grow especially in a tfsa
    However there is one area that media and the government shy away from and that is insisting regulatory oversight of the big banks and stand alone financial and securities industry participants do a much better job of protecting retail investors from what appears to be systemic white collar financial crime
    For example. When you take out a gym membership a basic protocol for the consumer entity oversight is to vet the contract clauses to ensure the *greement complied with law and industry code of conduct
    But oddly with so much more at stake our regulators don’t cover this off. And turn down right mullish when the contract clauses which clearly are a( odds with law and code of conduct are provided underlined. I quess what they turn a blind eye to they need not address
    The big bank owned brokerages are gingerly stepped around. Why?
    As well along with financial literacy why aren’t oversight educating consumers on the difference between advisors and advisers especially given fee drain shouldn’t retail get what they think they paid for not just a salesperson?
    Oversight pretend that retail using the lower fee business models eg discount brokerages don’t have specific protections relevant to their situation when in fact the statutes and industry codes of conduct have several provisions pertinent to those discount brokerga2 business models. But oversight pretend only those using advisors advisers a3e worth their time.
    This is one of the re*sons retail are increasingly concerned about their retirement
    It appears from what I have encountered oversight are more interested in protecting the industry and legacy high fee generators than retail investors

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