RRSPs advice

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Dec 10th 2009, 4:58 pm

#16

JonboyE

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Joined: Jul 2007

Location: White Rock BC

Posts: 11,682

Re: RRSPs advice

Quote:

Originally Posted by gryphea

Thanks JonboyE

Don't really understand the table

It says:
Marginal tax rate for dividends is a % of actual dividends received (not grossed-up amount). AND then it gives values of the income brackets-4%, 6%, 12%, 16%

So If I read it right then the most you ever pay is 16%, if you earn less than $40K they give you money on your dividends?

So I presume the dividends count towards your total income and then are taxed on the band accordingly?

Sounds like good deal to me?

OH has been asked to be a shareholder of a canadian company from MAy next year. You get no dividend for a year and then you get (what has been in the past) a very healthy dividend. Just trying to work out how it affects us tax wise. I have also heard if you get a line of credit to buy the shares- that the interest is tax free?

Think from next year we need to be getting ourselves an accountant!

There is a special tax treatment of dividends that recognizes that they are paid out of corporate earnings that have already been taxed. There are different calculations depending on whether the corporation is taxed at regular tax rates (eligible dividends), or at the small business tax rate (non-eligible dividends).

If the dividend is non-eligible the taxable value of the dividend is 25% more that the actual dividend received. However, you receive a tax credit equal to 13.33% of the taxable dividend. The amounts for eligible dividends are 45% and 18.9655%. These are the federal tax rates but the provinces have similar provisions.

So, if you receive a non-eligible dividend of $10,000 you report $12,500 as taxable income. You then claim a tax credit (effectively reducing the amount of tax you actually pay) of $1,666.66. Combined with the personal amounts this means that in BC a taxpayer can earn about $36,000 in non-eligible dividend income and, if this is their only income, pay no income tax.

In Alberta someone on the highest tax rates will be effectively taxed at 28% on the cash value of the non-eligible dividend received (16% eligible). A low earner receiving non-eligible dividends will pay tax at 10% of the cash value of the divided. If they received eligible dividends they would actually reduce the tax they would otherwise pay. Unfortunately, the dividend tax credit is non-refundable so no tax is the lowest you can get.

Oh, and yes, for an individual it is a good deal.

You can claim interest paid on a loan to buy shares as a deduction against income as long as the shares can produce dividend income. As Yoong said, you cannot claim the interest if the only income you can get is a capital gain, but as long as the shares are capable of producing dividend income you should be OK.