Thursday, April 5

The Joy of Dividends

Frugal Trader from Million Dollar Journey left a comment about dividend stocks after yesterday's post that made me want to write a more detailed response. In particular, he mentioned that dividends receive much more favourable tax treatment than other kinds of investment income.

My dilemma is that I'm not sure if the tax advantages are so significant when you own them in an incorporated company, which is where most of my investments are. "Most" of my income is already dividend income because that is the primary way my accountant has recommended that I withdraw money from my company. So my company earns consulting income, but I withdraw it as dividend income.

Now this makes me wonder whether by owning a company I am able to convert all kinds of income to dividend income. Can I earn capital gains, interest, rental income and anything else in my company and pay it all out as dividends? If that is the case, there is no advantage to earning dividend income within my company unless corporate taxation of dividends is similarly favorable. So far, I have only seen reference to personal taxation of dividends. Also, the corporate tax rate is more favorable then the individual tax rate, so any difference might not be that significant.

So if anyone knows about corporate taxation of different kinds of income, I would welcome your comments. Otherwise, I will try to ask my accountant about this when I see her at tax time this year.

3 comments:

MillionDollarJourney.com said...

I believe i've read somewhere that if you have a corporation, and you receive dividends from another corporation that the dividends received will be tax free? Perhaps that is something that you can ask your accountant. If that is the case, then dividends will still hold a tax advantage for you, even if it's under your corp.

FT

the money diva said...

Yes, if this is the case it would be very good indeed. I will have to look into it more. I will be sure to post when I have more info.
Thanks!
MD

Anonymous said...

I run a small incorporated business myself. I've run the numbers on this a gazillion ways. Basically, if you take a dollar earned by your small incorporated company, by the time you've paid the corporate taxes on it and then paid it to yourself as a dividend, you have essentially the same amount coming to you after all taxes as you would if you took it in salary. The difference is there is no CPP paid if you take your entire compensation as dividend with no salary. That is the 4.95% difference. It also means you have no CPP eligibility for that income (if you care). The very favourable treatment of dividends only applies to public companies and not small private companies. Check out the taxtips.ca Tax and RRSP savings calculators to see the difference. I do believe it's important to consider the total after tax value to you of your company's revenue before you decide where to hold an investment.