July 2023
Choosing Dividend Investing, When to Take CPP, and A Dividend Income Poll
Sorry about the delay in getting this out. I blame it on summer, and two visits from our daughter who lives in Vancouver. 😉
Many Investors Choose Dividend-Growing Stocks For The Following Reasons:
Eligible dividends are tax-efficient
They provide regular income
They protect against rising inflation
They reinforce the buy-and-hold strategy
Dividends continue to be paid regardless of whether the market goes up or down
Today I’m going to talk about the first reason above. Eligible dividends are tax-efficient if they are held inside a taxable account.
In an RRSP, when you withdraw funds you are taxed at your highest marginal tax rate regardless of how income is earned.
In a TFSA, you can earn income tax-free and withdraw funds tax-free. Awesome!
In a taxable account, you will pay tax on the income you earn, but different tax rates apply based on the type of income earned.
Here’s a chart from the website taxtips.ca This chart shows the combined federal and provincial tax rates as a resident of Ontario for 2023. You can run the numbers on the taxtips website yourself for your own province.
Don’t you just love how convoluted our tax system is in this country? The CRA definitely likes to keep us on our toes.
Let’s look at this chart a little bit closer.
Compare the “other income” column, which includes employment income, RRSP/RRIF withdrawals, foreign dividends, interest income and rental income, to the “eligible dividend” column. There’s quite a difference when it comes to paying tax on those income sources.
Considering many people have their entire retirement savings in an RRSP, they might be shocked to learn how much tax will be owing even if their income is lower in retirement than when working full-time.
Let’s look at an example and assume you are withdrawing $55,000 from an RRSP and I am earning $55,000 from eligible dividends in a non-registered taxable account. These are the only sources of retirement income we have and we both live in Ontario.
These numbers are taken from the taxtips.com investment calculator and you can run the numbers for your own province.
In this example, earning $55,000 in eligible dividends or capital gains would provide the lowest amount of tax owing, assuming this is in a taxable non-registered account and your only source of income.
Other income, as mentioned, would include interest income or rental income as examples. You can see how beneficial dividend income is over rental income when comparing tax rates.
You may be wondering why I have two RRSP withdrawals shown in this chart and why the tax is different. The second one is an example of eligible pension income, for example a RRIF/RRSP withdrawal that takes into account the pension credit if you are retired. This reduces the amount of tax owing only slightly.
Once CPP or OAS come into play, they will be taxed like other income.
This chart is for comparison reasons only based on the 2023 tax rates, and refers to a resident of Ontario. Use the calculators on the taxtips site as estimates. Always seek the advice of an accountant to get a more detailed view of your own situation as it relates to taxes.