Wednesday, June 10, 2015

Dividend Taxes

Taxes you pay on dividend income are less than on other income. I am looking at Ontario Taxes as that is the province where I live. Here I am talking about taxes wholly from eligible Canadian dividends.

Distributions from Income Trust companies are handled very differently as the distributions can be designated ad dividends, interest, foreign income or capital gains or some combinations of these categories. This also does not apply to dividends which are received from US or other foreign companies.

Most dividends from Canadian companies are eligible dividends. You can generally find this information on a company's web site. See this information on the website of Canadian Nation Railway. See information under Canadian Tax information. There is a statement there of "CN's dividends are designated as eligible dividends, as provided under subsection 89(14) of the Canadian Income Tax Act and its provincial counterpart".

What I want to compare is dividend income to salary income. With your income from dividends you get to keep a lot more of your income. In these examples I am comparing dividend and salary incomes of $35,000 and $70,000. I got my figures using my 2014 tax return software.

With a salary, not only do you have to taxes, but you have to pay CPP and EI premiums too. As shown in the table below, on $35,000 of salary you get to keep 80.68% of your salary and pay some 19.32% to the government. On $70,000 of salary you get to keep 74.18% of it and pay some 25.82% to the government.

Income Taxes CPP EI Net
$35,000.00 $4,544.85 $1,559.25 $658.00 $28,237.90
$70,000.00 $14,737.03 $2,425.50 $913.68 $51,923.79

If you get dividend income, it is treated differently. Because dividends are paid from after tax company money, the tax form grosses up your dividend income to take this into account and then gives you a Dividend Tax Credit. As you can see from the table below on $35,000 of dividend income you would get to keep 98.50% of your income and pay 1.5% to the government. On $70,000 of dividend income you would get to keep 95.58% and pay 4.42% to the government.

Income Taxes CPP EI Net
$35,000.00 $525.00 $0.00 $0.00 $34,475.00
$70,000.00 $3,093.35 $0.00 $0.00 $66,906.65
What is interesting about the above tax calculation is that the $525.00 tax on $35,000 of dividend income is the Ontario Health Premium. It is based on the dividend grossed up amount of $48,300. You can earn around $49,000 of dividend income before Federal taxes kicks in. Also you can earn just over $87,000 before Ontario taxes, besides the Ontario Health Premium, kicks in.

This is important because why I could stop working in 1999 and live off my dividends was because my net income was the same between my job and my dividend income. My gross income was not.

On my other blog I am today writing about McCoy Global Inc. (TSX-MCB, OTC- MCCRF) ... continue...

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