Comments on: Dividend Taxes are Going up

By: CanadianInvestor

CanadianInvestor — Thu, 28 Feb 2008 08:16:41 +0000

Someone may have done a more exact calculation but it looks like the increase in the dividend tax rate puts dividends pretty well on the same tax footing as capital gains except for the very lowest tax bracket (see Taxtips.ca ‘s table on the TaFSA for instance), i.e. for the taxable investor, that makes the two sorts of returns equally desirable from a tax perspective. If that’s the case, then the change makes life a little simpler since one doesn’t have to figure out whether to invest for cap gains / growth or dividend stocks in taxable accounts.

By: 0xCC

0xCC — Thu, 28 Feb 2008 01:40:46 +0000

Pablito, the entire amount withdrawn adds to your contribution room. Check out this link:
http://www.budget.gc.ca/2008/plan/chap3b-eng.asp

“Withdrawals will create contribution room for future savings.”
“In addition, in recognition of the fact that most people are likely to have multiple savings objectives at the various stages of their lives—e.g. to purchase a car, home or cottage—the full amount of withdrawals may be re-contributed to a TFSA in the future, to ensure that there is no loss in a person’s total savings room.”

By: Pablito

Pablito — Wed, 27 Feb 2008 20:51:51 +0000

Double post, my bad. Sorry!

By: Pablito

Pablito — Wed, 27 Feb 2008 20:50:52 +0000

But if you have to hide away your Canadian dividend yielding stock in the TSFA, then you can’t use it to shelter your non-Canadian yielding stock (assuming that is permitted?). As the non-Canadian stock has no tax breaks, we are losing at least a bit on one front to gain on another aren’t we?!

Of course, this will all be a problem I’ll look forward to when RRSPs, RESPs, and TSFAs are all maxed out.

I am a bit fuzzy on one aspect of the TFSA. Say you invest some amount of money and some period of time later value has gone up (dividends, interest, gain… whatever) and you withdraw a portion, just what/how much can be replaced? The entire amount withdrawn or only some portion proportional in some way to your original contribution? This make any sense? Granted, this would probably only be much of an issue if you managed to max out TFSAs every year.

By: Canadian Capitalist

Canadian Capitalist — Wed, 27 Feb 2008 17:51:17 +0000

Traciatim: Good point. Personally, I can’t complain much since I only have a small percentage of assets in taxable accounts. Between RRSPs, mortgage pay down and RESPs there is little cash left for taxable investments. Now, add TFSA into the mix and it will be even harder to make taxable investments. Still, we’ve got to complain to keep life interesting, eh?

By: FinancialJungle

FinancialJungle — Wed, 27 Feb 2008 17:18:14 +0000

It does seem stocks will probably get a one-time lift out of this, or maybe they already have since the market is forward looking. I’m not sure what % of dividend investors are registered vs non-registered. The lift would likely be negligible though. 2-3% perhaps?

I haven’t done the math, but I suspect British Columbians can still earn a substantial amount of dividends and not pay taxes; assuming no other incomes. My instinct is $45k’ish per spouse.

By: Canadian Capitalist

Canadian Capitalist — Wed, 27 Feb 2008 15:30:12 +0000

Rob: This increase is strictly for eligible dividends from Canadian corporations.

FJ: One more comment I wanted to make was that I for one was surprised by this tax. I thought that the corporate tax cut in the last fiscal update would benefit investors but this tax increase means that it is a wash (or maybe slightly negative).

By: Canadian Capitalist

Canadian Capitalist — Wed, 27 Feb 2008 15:25:01 +0000

FJ: That’s exactly the rationale specified for the dividend tax increase. The cut in corporate taxes will wash out the increase in the dividend tax. I agree with you and 0xCC that most corporations are likely to boost the dividend to make up for the tax.

However, I disagree that it is a wash because pension plans and other tax deferred entities don’t pay taxes of any kind. That means they are likely to be willing to pay more for the same amount of dividends that a taxable investor is willing to pay. I’m guessing that future dividend yields will be correspondingly lower.

By: 0xCC

0xCC — Wed, 27 Feb 2008 13:51:29 +0000

The difference between the GST and the dividend tax situation is that with the GST corporations were dealing with customers that they don’t really have any motivation to make completely satisfied. With the dividend situation they are dealing with investors that have way more clout than customers do. I think there will be some pretty strong pressure from the investment community to make sure at least some of the corporate tax cut makes its way into the hands of investors (unless the company has a really good use for that cash and can convince investors of that).

By: Eric

Eric — Wed, 27 Feb 2008 13:22:29 +0000

Isn’t this similar to what they tried with the GST. The idea was to reduce taxes on corporations and then pass that on to consumers, with the idea that businesses would even out but it didn’t because businesses didn’t pass on their savings in the form of lower prices. Won’t corporations just keep the dividend the same and keep the tax savings as bonues to the biggest cheeses?