# Alternatives To Dividend Income



## bariutt (Feb 2, 2013)

I am nearing the age of 65 so will soon start collecting OAS payments. If I consider my pension income and my investment income (mostly dividends) then I will be subject to the infamous OAS clawback. 

I know that dividend income is very tax efficient however the gross up calculation on the tax form makes dividend income not a good alternative when considering the OAS clawback.

Are there any good equity investment alternatives in lieu of dividend paying stocks that I might consider. In other words are there any good blue chip stocks where the total expected return is solely capital gains. My thoughts are that if these stocks are held in an investment account and not traded then for any given year they would not effect an OAS clawback.

I would appreciate any thoughts on reducit he OAS clawback. In my case all of the OAS paid to me in any given year will be clawed back with my current investment holdings.


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## treva84 (Dec 9, 2014)

bariutt said:


> I am nearing the age of 65 so will soon start collecting OAS payments. If I consider my pension income and my investment income (mostly dividends) then I will be subject to the infamous OAS clawback.
> 
> I know that dividend income is very tax efficient however the gross up calculation on the tax form makes dividend income not a good alternative when considering the OAS clawback.
> 
> ...


You could consider a corporate class mutual fund or ETF - the fees are a bit higher but they don't pay any dividends - it's all cap gains. There are even dividend focused CC ETFs that somehow convert regular dividends to cap gains (i.e. - https://www.purposeinvest.com/funds/purpose-core-dividend-fund/)


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## Eclectic12 (Oct 20, 2010)

bariutt said:


> ... Are there any good equity investment alternatives in lieu of dividend paying stocks that I might consider. In other words are there any good blue chip stocks where the total expected return is solely capital gains ...


The energy stocks that are dropping their dividends are likely changing the numbers a bit but the last I checked, the TSX composite was over 70% dividend paying stocks. I haven't personally verified it but another thread said the S&P500 is 75%+ dividend paying stocks.

One investment that pays cash that would help is a REIT that pays 80 to 100% of their cash as return of capital (RoC). The high RoC component means that where one buys/holds, in about four years or so ... one would have to start paying capital gains on the cash paid. Capital gains has less of an effect.

Something like RioCan which pays 50% or better of it's cash as income would be more heavily taxed but would reduce the amount of dividend gross-up.


Horizons BetPro has a swap structure ETF for both the TSX and the S&P500 which converts the dividends to a capital gain so there is only a capital gain when one sells. As long as you are comfortable with the swap structure, it would allow for better control of when income is reported as the REITs have cash paid where the types do vary.
http://www.horizonsetfs.com/home


Cheers


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## Numbersman61 (Jan 26, 2015)

bariutt said:


> I am nearing the age of 65 so will soon start collecting OAS payments. If I consider my pension income and my investment income (mostly dividends) then I will be subject to the infamous OAS clawback.
> 
> I know that dividend income is very tax efficient however the gross up calculation on the tax form makes dividend income not a good alternative when considering the OAS clawback.
> 
> ...


I know the feeling. I'm 74 and haven't seen a dime of OAS due to clawback and don' expect I will in the near future. Sure the dividend gross-up hurts but I still feel dividends are the most tax efficient type of investment income. The good news is my wife will be turning 65 this year and she likely will not have a large clawback.


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## atrp2biz (Sep 22, 2010)

Ah, reminds me of this thread.

If the goal is to replicate an index or a traditional equity ETF, then as E12 has already mentioned, swap-based ETFs are the way to go. Here are a couple of articles that explain what these funds are.

http://canadiancouchpotato.com/2011/06/06/understanding-swap-based-etfs/
http://www.moneysense.ca/columns/more-swap-based-etfs-on-the-horizon/


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## Eder (Feb 16, 2011)

Having excess dividend income resulting in OAS clawback is a great problem to have as a senior. Why not just ignore it and leave those unused pension funds for those that desperately need them?


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## Eclectic12 (Oct 20, 2010)

Numbersman61 said:


> ... I'm 74 and haven't seen a dime of OAS due to clawback and don' expect I will in the near future.
> 
> Sure the dividend gross-up hurts but I still feel dividends are the most tax efficient type of investment income.


Where one can't avoid it anyway, I suspect it is better to stick to what one knows.

OTOH, if I had so much income in retirement that OAS is clawed back fully ... I will be ecstatic.


Cheers


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## tygrus (Mar 13, 2012)

You didnt mention if you have a TFSA or not. All the income out of those accounts has no effect on your OAS.


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## bariutt (Feb 2, 2013)

Yes both my wife and I have maxed out our TFSA accounts


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## agent99 (Sep 11, 2013)

REITS and some funds are structured to pay all or part of their distributions as ROC. There is no tax payable in current year on the ROC portion nor is there any gross up. 

When we first retired, we used funds that payed their distributions as 100% ROC. This reduced our immediate taxable income and allowed us to draw down our RRSPs. Some of these funds disappeared, but equivalents are no doubt still available. We used TD H series funds as well as some others.

While doing a search came across this older link. It might be of some help:

http://www.moneysense.ca/columns/tax-efficient-investing-with-etfs/

ROC will of course reduce your acb which in turn will increase CG on which tax will eventually have to be paid. But only when you sell. In my case this is a bit of a problem. We have held Riocan for many years. Each year ROC reduces our acb. Paper capital gain is now so high, it would be hard to justify taking some profit.


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## lonewolf (Jun 12, 2012)

If renting might want to consider buying a house less money would then becoming in from investments as investments would be sold to buy house/condo. More money coming in from OAS less money going out for rent. Might not be practical though if not for longer term commission costs & HST you wont get back when selling.


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## bariutt (Feb 2, 2013)

lonewolf - Yes thanks but I already own my own home. Although the total OAS clawback is only about $6000 or so per annum it just burns me that this is just another tax grab. When I see how Justin Trudeau is throwing away our hard earned tax dollars each week I am determined to give him as little as possible.


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## Numbersman61 (Jan 26, 2015)

bariutt said:


> lonewolf - Yes thanks but I already own my own home. Although the total OAS clawback is only about $6000 or so per annum it just burns me that this is just another tax grab. When I see how Justin Trudeau is throwing away our hard earned tax dollars each week I am determined to give him as little as possible.


I fail to understand why retired folks who have above average income get so fussed about losing OAS as a result of the clawback. The reality is you don't need it.


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## atrp2biz (Sep 22, 2010)

Barring any other obligations, everyone has a fiduciary duty to themself.


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## Eclectic12 (Oct 20, 2010)

agent99 said:


> REITS and some funds are structured to pay all or part of their distributions as ROC. There is *no tax on the ROC portion* nor is there any gross up ... ROC will of course reduce your acb which in turn will increase CG on which tax will eventually have to be paid. *But only when you sell.* ...


You understand that CG will be generated by the RoC paid but claim there is "no tax"?
Tax deferred is still tax in my books.

As for the "only when you sell", how come so many sources say one may have to pay the CG *yearly*?


> For tax purposes, the important thing to know is that if your ACB does fall to zero, any subsequent distributions of ROC would be treated as capital gains. In this case, you wouldn’t deduct them from your ACB, but would *pay tax for the year the distribution was received.*


http://www.theglobeandmail.com/glob...apital-means-to-fund-investors/article547291/
http://howtoinvestonline.blogspot.ca/2010/07/return-of-capital-separating-good-from.html
http://www.taxtips.ca/personaltax/investing/taxtreatment/incometrusts.htm

Perhaps it is your understanding that needs to be adjusted?




> In my case this is a bit of a problem. We have held Riocan for many years. Each year ROC reduces or acb. Paper capital gain is now so high, it would be hard to justify taking some profit.


RioCan is a bad example for the OP's purposes as they pay little in RoC where it will take a long time to have a zero ACB and have to start paying CG yearly compared to some other REITs. Over the last decade, the low has been RoC of 0.52% through a high of 63.14%. Income which is taxed at high rate, has ranged from 31.24% to 64.38%. As soon as I noticed how consistently and high the income was, I transferred to my TFSA.

For some REITs I have held in the past, buying then holding for as little as four years would have meant reporting/paying CG on one's yearly tax return. I avoided this tedious task by buying more on the dip.

As for a large CG ... I am not following what your problem is. You control what/when/how much you sell, whether there is a CL to wipe out the CG and should be able to control how much of a hit any given tax year is taking. Holding until it is all sold at once seems to be the main problem.


Cheers


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## Eclectic12 (Oct 20, 2010)

It occurs to me that another choice is to buy a stock that pays in-eligible dividends. The up side is that income is income with no gross-up. The down side is the taxes on the dividends are much higher ... but where one likes something like McD's as an investment anyway - maybe it is no big deal.

The other alternative is to choose to be buying/selling stock that does not pay dividends where all the income from selling will be a CG. As I say, with so much of the Canadian and US markets paying dividends, it won't be easy and possibly hard to balance.


Cheers


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## Eclectic12 (Oct 20, 2010)

bariutt said:


> ... Although the total OAS clawback is only about $6000 or so per annum it just burns me that this is just another tax grab ...


I would have thought you'd be more upset about paying for GIS/OAS while working when you are getting no payout at all. That seems far more of a "tax grab" to me. :biggrin:

Of course if I didn't value education, I could be concerned about the tax grab of paying for other people's education over thirty plus years.

Cheers


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## Eclectic12 (Oct 20, 2010)

agent99 said:


> bariutt said:
> 
> 
> > ...I know that dividend income is very tax efficient however the gross up calculation on the tax form makes dividend income not a good alternative when considering the OAS clawback ...
> ...


I'd recommend one does one's due diligence for their tax juristication, for the tax efficiency of eligible dividends.

For a while now, several provinces such as NS, ON, BC, QC and SK to name a few have higher tax rates on eligible dividends than CG at high income levels. NS seems have the worst spread with the eligible dividends being 14.58% more expensive than CG (though at a taxable income over $200K, OAS will be long gone!). 

Ontario and Quebec's point of eligible dividends becoming more expensive than CG are over $90,563 and over $84,780, respectively.


Cheers

*PS*

*sigh* ... like so many other sources, the article makes what looks like an always true statement "ROC is not taxed in the year it’s received". In fact, it is a YMMV situation driven by the ACB.


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## agent99 (Sep 11, 2013)

Eclectic12 said:


> Perhaps it is your understanding that needs to be adjusted?


I think you either have too much time on your hands or you are just looking for an argument.

I was trying to be helpful and I believe explained myself clearly enough. There is nothing wrong with what I said except to be precise, I should have said - no* current* tax on ROC. 

Please try and find someone else to argue with or get a life.


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## Eclectic12 (Oct 20, 2010)

Many people believe that RoC being paid is tax free ... which is not the case.

If it is an over sight or incomplete ... then fair enough.


Cheers


*PS*

Another misunderstanding is where people write that RioCan pays dividends instead of a mix of income.


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## james4beach (Nov 15, 2012)

bariutt said:


> Are there any good equity investment alternatives in lieu of dividend paying stocks that I might consider.


A very good question. All that matters in the end is total return. In your case you're describing the goal of achieving the total return mostly through capital gains rather than a significant amount of dividends.

I'll suggest some answers

1) How about the basic indices, TSX Composite itself? (XIC or ZCN). This is the national benchmark for total return, and it's hard to do better than this in Canada. You would regularly sell off shares as required, which creates capital gains or losses. This is what I have recommended to my parents. To work through the thought process on this, see this recent thread

2) It's possible that you say XIC still pays too much dividends. You could switch to a lower yielding national index, like the TSX Midcaps, XMD. This unfortunately tends to be more volatile than TSX Composite and unfortunately has underperformed.

3) You could try following my non dividend portfolio, DIVZ. In the last few years, it has beaten the TSX Composite and has paid *no dividends* -- it's all capital gains. This is an active area of interest for me and I post my updated portfolio approximately ever 6 months. The current portfolio (generated in December) is currently lagging the TSX Composite performance by 1%


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## james4beach (Nov 15, 2012)

As someone mentioned here, that Horizons fund, HXT, could be useful for you.

The main reason I'm trying to develop DIVZ and am not just using HXT, is because I have tax constraints placed on me by the US I.R.S. that makes it impossible for me to hold non-registered Canadian ETFs.


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## OhGreatGuru (May 24, 2009)

I don't like the way dividend income is grossed up either. But otherwise, I have a hard time finding sympathy for OP. If he is facing 100% OAS clawback, his 2015 income is over $117K. He & his spouse have maxed out TFSA's. With a pension he is eligible for pension $2K income deduction; & pension splitting (if it makes economic sense to do so). If his spouse has so much income there is no point in splitting pension, then she must have at least $45K income. So, $160K+ family income, home paid for, and plenty of invested assets. Why should he be subsidized with OAS, which is paid for from current revenues?


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## tygrus (Mar 13, 2012)

Sorry, no free lunch. T2 is already talking about raising capital gains taxation.

I guess next up is bars of gold.


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## james4beach (Nov 15, 2012)

I think gold bars are also taxed with capital gains, just like stock gains - right?


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## jacofan (Apr 17, 2013)

OhGreatGuru said:


> I don't like the way dividend income is grossed up either. But otherwise, I have a hard time finding sympathy for OP. If he is facing 100% OAS clawback, his 2015 income is over $117K. He & his spouse have maxed out TFSA's. With a pension he is eligible for pension $2K income deduction; & pension splitting (if it makes economic sense to do so). If his spouse has so much income there is no point in splitting pension, then she must have at least $45K income. So, $160K+ family income, home paid for, and plenty of invested assets. Why should he be subsidized with OAS, which is paid for from current revenues?


was thinking the same thing when I read first post


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## humble_pie (Jun 7, 2009)

tygrus said:


> Sorry, no free lunch. T2 is already talking about raising capital gains taxation.



where is the prime minister talking about raising capital gains taxation? sorry i have not seen a word about this anywhere, would truly be curious to know more.


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## bgc_fan (Apr 5, 2009)

humble_pie said:


> where is the prime minister talking about raising capital gains taxation? sorry i have not seen a word about this anywhere, would truly be curious to know more.


He may be referring to stock option treatment being taxed as salary.


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## My Own Advisor (Sep 24, 2012)

Numbersman61 said:


> I know the feeling. I'm 74 and haven't seen a dime of OAS due to clawback and don' expect I will in the near future. Sure the dividend gross-up hurts but I still feel dividends are the most tax efficient type of investment income. The good news is my wife will be turning 65 this year and she likely will not have a large clawback.


Numbersman61 - you have a great problem to have if you are fully clawed back from OAS income. I can only hope I will be in your position in retirement!


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## OhGreatGuru (May 24, 2009)

In spite of my diatribe about being entitled to entitlements, the answer to OP's question is to move more of his investments to securities that provide more earnings from capital gains as opposed to dividends, as capital gains have only a 50% inclusion rate for income tax purposes. This assumes he can tolerate more year-to-variability in his returns, which I'm guessing he can from his limited profile information, but that would be for OP to decide.


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## humble_pie (Jun 7, 2009)

here's another turn-dividends-into-capital gains widget. A handful of alberta energy companies pay a special class of dividends called capital dividends. These are *not* DRIP dividends.

the investor receives new shares as his dividend, which he uses to write down his capital cost. No T5 or other tax slip is ever issued. Eventually, when investor comes to sell his shares, he will have a capital gain or loss.

best-known among these companies are Arc Resources & Gibson Energy. Both presently have high dividends.

the catch is that these shares are gruesomely difficult for an investor to administer. Best bet is to hold these shares in a capital share reinvestment plan with the transfer agent. It's necessary to purchase shares registered in one's name - usually a $50 fee at most brokers although questrade is said to charge $300.

ownership of this share certificate prohibits an investor from swing trading since the certificate can't be chopped up, ie if one holds a cert for 5000 shares, one cannot sell 500 shares out of it. One could request another certificate for accumulated dividend shares from the transfer agent & deliver that to the broker for sale ... but once again the administrative logistics are slow & awkward.

CIBC is the only broker that has developed a system to handle capital dividends, although even at that, the CIBC plan is unworkably difficult imho. Investors must phone this broker before each & every X date to request that each individual dividend be structured as a capital share dividend, not a regular dividend or a DRIP dividend.

since ARX & GEI pay dividends every month, the prospect of having to phone the broker by deadline 24 times a year puts me off. My attitude is that, to make all the bother worthwhile, one should own something like 5000 shares each in ARX & GEI. But over the past year, the times have not been conducive to making a big investment in energy stocks.


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## Numbersman61 (Jan 26, 2015)

jacofan said:


> was thinking the same thing when I read first post





My Own Advisor said:


> Numbersman61 - you have a great problem to have if you are fully clawed back from OAS income. I can only hope I will be in your position in retirement!


A little clarification is needed on my situation. First, I had a "gradual" retirement. I was a senior officer of an energy company until the age of 68 when it was sold - made a very significant profit. In addition, I also was a director of two energy service companies - retired at age 70. For the next of couple of years, I was reporting income that had been deferred in prior years (stock option benefits and deferred share compensation). Up until 2015, I also had a fair amount of capital gains.


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## james4beach (Nov 15, 2012)

It sounds like you are very well positioned overall.

I don't really understand the main problem. Why don't you just buy XIU or ZCN for TSX Composite index? Do those provide too much in dividends?


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## My Own Advisor (Sep 24, 2012)

Well, it sounds like you had a great job and were compensated for it. Overall, even with the tax headache in retirement, well done!!


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## tygrus (Mar 13, 2012)

Here's that article about capital gains tax changes. Boy I dont know what happens if he hits those. 

http://business.financialpost.com/p...e-on-the-table-in-the-march-22-federal-budget


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## jacofan (Apr 17, 2013)

Numbersman61 said:


> A little clarification is needed on my situation. First, I had a "gradual" retirement. I was a senior officer of an energy company until the age of 68 when it was sold - made a very significant profit. In addition, I also was a director of two energy service companies - retired at age 70. For the next of couple of years, I was reporting income that had been deferred in prior years (stock option benefits and deferred share compensation). Up until 2015, I also had a fair amount of capital gains.


Isn't the OAS just a pittance to all you other assets? A few grand a year should be nothing to you in the big picture? You are mid-70's year old and have a big nest egg. Spend and enjoy...


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## humble_pie (Jun 7, 2009)

tygrus said:


> Here's that article about capital gains tax changes. Boy I dont know what happens if he hits those.
> 
> http://business.financialpost.com/p...e-on-the-table-in-the-march-22-federal-budget



thankx tygrus for taking the trouble to find & post that article.

but there's nothing in it except a brief history & a bird's eye overview of capital gains tax in canada. Basically the column is just jamie golombek on a dry week when he can't think of anything more interesting, so he's filling his obligatory column inches with prattle.

in another post you said that *they* are talking about increasing capital gains taxation. I assumed by *they* you meant liberal politicians, i assumed you were referring to one or more liberal leader who has clearly hinted at higher capital gains tax

except that they haven't. Other than changing taxation of stock options for executives, i've never seen or heard one liberal peep or squeak on the CG issue. I've never seen or heard an NDP peep or squeak on increasing CG taxation either, although the new dems are the party that one would expect to push this envelope.


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## Jaberwock (Aug 22, 2012)

After accounting for dividend gross up and OAS clawback, dividends tax rates are still lower than the tax rates on interest income.

Don't let the OAS clawback influence your investment decision. Quality dividends stocks are still one of the best investments you can make to fund your retirement.

If you are in a position where you have to declare deferred income in the years immediately after retirement, then wait before applying for OAS. You can defer OAS to age 70 and receive more, just as you can with CPP


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## james4beach (Nov 15, 2012)

Here is a list of the stocks in the TSX Composite Index that have zero dividends, as of June 23

ATA
AAV
AC
ASR
AYA
AVO
BTO
DOO
BTE
BIR
BB
BBD.B
BBU.UN
GIB.A
CFP
CLS
CR
DSG
DGC
ELD
EDV
FR
GTE
GC
GUY
HSE
IMG
IFP
KEL
KXS
K
KGI
LUN
MAG
MEG
MNW
NGD
NG
NVA
PXT
PD
PVG
PLI
RRX
SMF
VII
SW
SSO
IT
TXG
TOU
TRQ
VRX


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