Why Choose Dividend Income over Interest Income?

A common question that arises with many as they research Business and Investment Opportunities in Canada is what tax implications are there with respect to Dividend income through Investment Shares or Interest Income from asset and equity lending.  The heart of the question is; how can I save the most while optimizing my investment funds.

How are you taxed on Dividend Income compared to Interest Income?  Let's compare.

 

Ontario Combined Federal and Provincial Tax Rates Including Surtaxes 2011 Marginal Tax Rates
2011 Taxable Income	Other Income	Capital Gains	Eligible Dividend	Non-Eligible Dividend
First $37,774	20.05%	10.03%	-3.93%	2.77%
$37,775 to $41,544	24.15%	12.08%	1.85%	7.90%
$41,555 to $66,514	31,15%	15.58%	11.72%	16.65%
$66,515 to $75,550	32.98%	16.49%	12.50%	17.81%
$75,551 to $78,361	35.39%	17.70%	15.90%	20.82%
$78,361 to $83,088	39.41%	19.70%	18.32%	23.82%
$83,089 to $128,800	43.41%	21.70%	23.96%	28.82%
$128,800 and over	46.41%	23.20%	28.19%	32.57%

  

Interest Income

In Canada, when it comes to claiming income derived from Interest received from Canadian Investments the calculation is quite simple.  If you invest $100,000.00 into a Private Real Estate Mortgage or Business Loan at 10% calculated annually (we are using straight interest to keep things simple) the calculation is as follows.

$100,000.00 x .10 = $10,000.00

There we have the calculation $10,000.00 is added onto your total income.  You are taxed 100% on this income.  Although there are small deductions you have such as carrying costs, you will not be able to reclaim that portion you just added on.  If you could, it wouldn’t be much of an investment.  Would it?

Dividend Income

Dividend income is a little bit harder to explain and I would caution investors to seek professional assistance from a taxation office such as Accutrac Business Services.

The first thing that  you must realize is that Corporations such as Accutrac Capital pay out dividends only after all corporate taxes are paid to the government.  This entitles you as a Class "A" shares holder to receive tax credits through the Enhanced Tax Credit Program from CRA.  Now that you understand that tax credits are on the horizon let's see how they effect you.

We are going to use the same income received through the interest income example of $10,000.00.

You are required to Gross Up that dividend income by 41% (2011 rates) or $4,100.00.  This is then added to your income.

$10,000.00 + $4,100.00 = $14,100.00

From your total income you must then figure out your marginal rate.  For 2011 a resident of Ontario’s Marginal rate is 31.15%.  Using this rate multiply your “grossed up” dividend income by it.  This is your credit through the Enhanced Dividend Program. 

$14,100.00 x 31.15% = $4,392.15

Now you may be thinking, wait a second!  What is this “Gross Up” business?  I don’t want to increase my income!  While on the surface, grossing up the dividend shows as an increase let’s point out the credits that go along with that dividend.

The Federal Tax credit is 16.44.

$14,100.00 x 16.44% = $2,318.04

The Ontario Provincial Tax Credit is 9.02%

 

$14,100.00 x 9.02% = $1,271.82

Now lets put it all together.

What Does This Mean For You?

Everything comes down to the question, how does this benefit me?  As you can see from the graphic below an individual who invests their funds with Accutrac Capital through the purchase of High Yield Shares is paying less income tax on those investment funds and as shown in the graphic below has a higher after tax income of over $21,000.00 over the course of a ten year term.

 

 

Now That’s An Investment!!!