It’s a tax slip: one that reports your investment income. Most investors say they would rather not receive a T5. After all they report income, you’d assume that would mean taxes.
Don’t jump to conclusions though. In some cases you should be happy to receive a T5, which can result in a tax refund.
See for yourself. It’s easy to find an online calculator that will illustrate the impact. Enter your income, see what would be owing, then add dividend income and compare. What you will see is that your taxable income will go up, but you will receive something called the Dividend Tax Credit, which can more than offset your additional taxes.
I tried it myself, using a hypothetical example: a retiree age 72 who has just converted a $200,000 RRSP to a RRIF and has begun drawing the RRIF minimum of $14,960 annually; CPP and Old Age Security income totaling $16,000; and a $200,000 investment portfolio wisely invested in Canadian dividend-paying stocks. To determine the amount of dividend income I assumed the money was invested in the Raymond James Dividend+ Guided Portfolio (17 conservative, dividend-paying Canadian stocks) with a current dividend yield of 3.5 per cent.
The result? Taxes fell. That’s right. Taxes were actually lower after adding in $7,000 of dividend income.
This may sound like a loophole the government may soon close, but really it is not. Companies pay dividends out of profits that are already paid at the corporate level. The money has already been taxed. And in many cases at a higher rate than income would be taxed in your hands. The dividend tax credit is a mechanism designed to factor this in — to eliminate double taxation, or over-taxation. Typically it works to your advantage.
There are some catches. To begin we are assuming eligible dividends, from large, profitable public corporations. You must also consider the impact dividend income can have on government benefits such as OAS and the GIS. Depending on your personal circumstances claw-backs may apply.
This is not the case with foreign dividends which are taxed as regular income. Because of the complexities of factors such as marginal tax rates and government claw-backs there is no simple rule of thumb that will tell you whether dividend income is appropriate for you.
— Jim Grant is a regular NEWS columnist, call 250-752-8184, or visit www.jimgrant.ca. This is for information only and reflects the opinions of the author, not necessarily those of Raymond James Ltd,. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.