Weekly Tax Tips
Review the Mix of Investments in Your Portfolio
Date: 17 Sep 2010
Each type of investment income is taxed differently. Most interest must be accrued annually and is fully taxed. Dividends are only taxed as received and are eligible for a dividend tax credit. Capital gains are taxed when realized and, after the reduction of the capital gains inclusion rate to 50%, were generally taxed at a lower rate than dividends. However, the capital gain vs. dividend comparison changed significantly in 2006 as the changes in the taxation of dividends significantly lowered the tax rate that applies on eligible dividends.
In general, most dividends paid by a Canadian public company after 2005 will be an eligible dividend. These dividends are subject to a 44% gross-up in 2010 (rather than the 25% gross-up that continues to apply for ineligible dividends) and are eligible for a higher dividend tax credit (for 2010, approximately 18% of the taxable amount federally vs. 13 1/3% for an ineligible dividend). Most provinces have also introduced a higher tax credit on eligible dividends. Note that with federal corporate tax rate reductions being phased in until 2012, there are adjustments to the eligible dividend gross-up and dividend tax credit rates from 2010 to 2012 that will increase the tax rate on eligible dividends.
Year-end is an excellent time to review the mix of investments in your portfolio to ensure that you’re getting the best returns on an after-tax basis.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 17 Sep 2010.
More Tax Tips Here!
