POSTED ON MAY 21, 2023 BY STEPH

Discover the tax free way to build a cash flow at any age.

As a Canadian investor, young or mature, understanding the tax implications of dividend income is crucial for maximizing your investment returns.

 In this blog post, I would like to explain the basics of dividend taxation and provide you with essential insights to help you navigate your investment journey.

Eligible vs. Non-eligible Dividends:

Eligible dividends:

• These are dividends paid by Canadian corporations that are eligible for the enhanced dividend tax credit.

Non-eligible dividends:

• Dividends you have received from sources such as foreign corporations or Canadian corporations that do not qualify for the enhanced dividend tax credit.

Enhanced Dividend Tax Credit:

• Eligible dividends receive a higher gross-up on your income and then a corresponding tax credit, resulting in a lower effective tax rate for most, but not all investors. Dividend tax credits are applied at your income level.

Taxation on Dividend Income:

• This mean that Dividend income is taxed at your marginal tax rate, which depends on your total income and the province in which you reside. Each province has it’s own rate.
• For eligible dividends, the gross-up rate is currently 38%, meaning that only 62% of the actual dividend amount is subject to taxation.

Tax-Efficient Strategies for Dividend Investing:

• If possible, utilize Tax-Free Savings Accounts (TFSA) first!
• Contributions made to a TFSA grow tax-free, including dividend income. Your tax bracket does not matter in a TFSA. 
• The Dividend Tax Credit only applies to non-registered accounts.
• Registered Retirement Savings Plans (RRSP) are also tax free, dividends earned within the account are not subject to immediate taxation. They are however, taxable as regular income when you start withdrawing the dividends as income.

Tax rules and regulations:

• Investment income can be complex and rules are always subject to change. Consult with a tax professional or financial advisor who specializes in investment taxation to ensure you make informed decisions and take advantage of available tax benefits.

Thoughts and information expressed here is solely based on my opinion, this information should not be considered tax advice. Consult your professional before many any major decisions. 

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