# Tax on dividends vs interest securities



## Flash (Nov 25, 2014)

Hello. So it seems most securities pay dividends, which AFAIK have their own, low taxation system. However, some pay as "interest", such as REIT or some consumer (in my case A&W). Do these also get taxed at the special dividend taxation rate, or are they taxed at full rate, similar to having money in a HISA at a bank?

Also I remember seeing the tax rate table for canadian dividends, but I lost it. Anyone has a link?

EDIT: Found it: http://www.taxtips.ca/taxrates/bc.htm (apparently this info is very hard to find on google).

How come some eligible dividends give a negative tax rate? And what is the difference between eligible and non-eligible? Are eligible Canadian dividends only?


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## Eclectic12 (Oct 20, 2010)

Be careful as it does not sound like you understand how to find out what cash paid is a dividend, what is not and what is a partial dividend. For example, you say "some pay as "interest" such as a REIT".

Few REITs pay a cash distribution that is one type of income - most pay a mix. This means one has to report the different types on one's tax return where one will pay different tax rates for each type, in proportion to the total paid. 

For example, for RioCan in 2014 when you check their web site in the investor section under "Tax Info" the $1.41 cash paid per unit owned was made up of 40% "other income" which is taxed like interest, 1.55% "Capital Gains" (least tax owing), 6.27% "Foreign Non-Business Income" (taxed like interest) and 51.95% return of capital (usually tax deferred, to be paid as capital gains).

On the other hand, Chartwell Retirement Residences REIT paid 78.4% return of capital last year, 0.51% Foreign Non-Business Income, 2% Eligible Dividends, 19.09% Other Income.

These portions usually change year by year.


Where there is a mix - one pays different rates on the different amounts (ex. 40% "other income" on $1.41 paid is $0.56 to report/pay tax on the same as employment income).


If held by a broker, you should receive a T3 tax form breaking down the types of income to report. You will have to subtract the return of capital from the investment cost (ACB) to determine if anything has to be reported on that particular year's tax return.

http://www.dividendearner.com/understanding-the-tax-treatment-on-income-trust/
http://www.theglobeandmail.com/glob...our-head-around-reit-taxation/article5575073/


You mention A&W ... if you mean A&W Revenue Royalties Income Fund, it appears that in 2014 - it paid everything as "non-eligible dividends". Where it's held in a taxable account, it will be taxed more than eligible dividends.

The link is http://www.awincomefund.ca/default.asp ... then scroll to the bottom looking for the title "
Investor Information". Immediately under it is "For 2014 tax information, click here."



Google is your friend ...

For eligible dividends ...
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/dvdnds/menu-eng.html

Non-eligible dividends are dividends paid by a company that is either not Canadian or it does not qualify (ex. A&W is a Canadian company but did not pay eligible dividends last year).


Some ranges of income will mean that the eligible dividends have a negative tax rate because the province has decided that the corporation has already paid more taxes than should be covered by the corporation plus the investor ... so they refund some tax money.


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## Davis (Nov 11, 2014)

(I am simplifying things a bit here by leaving out details that are not important to answer the question.)

Corporations determine their taxable income by deducting from their total income expenses in doing business, like wages, salaries, costs of inputs, and interest paid on money they’ve borrowed, e.g., by issuing bonds.

Corporations then pay income tax on their taxable income. Generally speaking, they pay either at a high rate for large corporations, or at a lower rate for small corporations. 

Corporations then pay dividends to investors from the income they have left after paying tax. 

The investor who pays income tax on the interest they’ve received on bonds they hold, and on dividends they’ve received on the shares they own.

Because the dividends are paid out of the corporation’s after-tax income, tax is being paid twice – once at the corporate level, and then a second time by the investor. This “double taxation” doesn’t occur for interest income, because it is paid from before-tax income – the corporation is allowed to deduct interest in calculating its taxable income. 

Double taxation of dividends would give corporations and investors incentives to avoid paying dividends, and distort business decisions away from equity and towards debt.

To prevent this, the government has created pretty complicated dividend gross-up and tax credit system. This reverses the corporate income tax and giving the investor a tax credit for the tax that has already been paid at the corporation level. This way, debt and equity issued by the corporation are taxed in the same way, and business decisions are not distorted. For the investor, it looks like dividends are taxed less, but in fact, the total corporate and personal income tax on dividend income is about the same as the personal income tax on interest. 

Because large corporations are taxed at a higher rate than small corporations, dividends from large corporations are “eligible” for a higher dividend tax credit. Dividends from small corporations are “non-eligible” for the higher tax credit. 

Real estate income trusts are structured so that virtually all of their income is paid out to investors, so no tax is paid at the corporation level. Consequently, there is no dividend gross-up and tax credit.

A&W is a bit of a mystery to me, which is bad since I own it. I thought that being an income trust, its distributions would be fully taxable. But it does seem that its distributions are being taxed as dividends from small corporations. I speculate that it is receiving its income from franchisees, who are all small businesses, so it is then passing the income and corresponding tax treatment along to unit holders.


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## Eclectic12 (Oct 20, 2010)

^^^^

Perhaps the confusion is that you are equating a trust with having to report the cash payments as fully taxable?


Staying as trust as I understand it means that one is under the SIFT tax rules. If like RioCan, it qualifies as a RE trust - then the old, tax advantaged rules apply. If they don't qualify, then the same tax rates as a regular corporation (i.e. a higher tax rate to the company).

Most trusts looked at what they were doing and decided the cost of converting to a corporation (in some cases, this was a second conversion) put them in a better position than staying as-is and paying additional taxes internally. For example, ARC Resources Ltd (ARX) used to be a trust and after evaluating the trust rule changes, converted to a corporation.


How the cash paid out is taxed in the investor's hands depends on what they are paying out ... not the trust structure.


As for "dividends from small corporations", I guess so ... though I'd have thought that these would be eligible dividends instead of non-eligible ones.


Bottom line seems to be that staying in the trust structure without qualifying as a RE trust does not change that the trust can have parts of their cash payments be different income types.

Case in point ... Boston Pizza Income Fund in 2014 paid 4% as return of capital and 95.8% as eligible dividends. I'm pretty sure it also does not qualify as a RE trust.


Cheers


*PS*

Perhaps an easier way of explaining "eligible dividends" is by saying "eligible for Canada's dividend tax credit". I believe it is the DTC that is resulting in the lower tax rate.


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## Squash500 (May 16, 2009)

I have an accountant who just did my taxes. I managed to save over $4000 in taxes by investing in CPD and XDV in my non-registered account, as opposed to putting more money in XTR or XBB etc.

I was so happy with saving over $4000 in taxes, that I just recently sold some XTR (for a small capital loss), and bought more CPD in my non-registered account. CPD is presently yielding 5.06%, or more when you consider that all of CPD's income is eligible dividends, except for some CPD income which is ROC.

My goal is to create the most tax-efficient income stream for myself as possible. I will do this by trying to eventually make most of my income in my non-registered account being eligible for the Canadian dividend tax credit.


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## CalgaryPotato (Mar 7, 2015)

Squash500 said:


> I have an accountant who just did my taxes. I managed to save over $4000 in taxes by investing in CPD and XDV in my non-registered account, as opposed to putting more money in XTR or XBB etc.
> 
> I was so happy with saving over $4000 in taxes, that I just recently sold some XTR (for a small capital loss), and bought more CPD in my non-registered account. CPD is presently yielding 5.06%, or more when you consider that all of CPD's income is eligible dividends, except for some CPD income which is ROC.
> 
> My goal is to create the most tax-efficient income stream for myself as possible. I will do this by trying to eventually make most of my income in my non-registered account being eligible for the Canadian dividend tax credit.


You are aware, that you're trading lower volatility investments for higher volatility investments though right?

I'm not saying it's wrong for you, just don't let taxes drive your asset allocation.


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## Davis (Nov 11, 2014)

Eclectic12 said:


> Perhaps the confusion is that you are equating a trust with having to report the cash payments as fully taxable?
> 
> 
> 
> ...


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## Squash500 (May 16, 2009)

CalgaryPotato said:


> You are aware, that you're trading lower volatility investments for higher volatility investments though right?
> 
> I'm not saying it's wrong for you, just don't let taxes drive your asset allocation.


Excellent post. I am taking on more risk in my portfolio, but I'm prepared for the consequences. I realize that my portfolio, might not be very appealing to some investors. However, I really need the extra monthly income that my non-registered portfolio is providing me.

The fact that I'm saving money on taxes is an added bonus.


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## Flash (Nov 25, 2014)

Ok, question. Do the T3's and T5's issued by brokers, take care which dividends are eligible and which are non-eligible and anything in between (capital gains, foreign dividends, foreign interest)? Is the tax credits for eligible canadian dividends automatically apply when I input the numbers from T3's and T5's into my tax program (using StudioTax here, great awesome program)


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## AltaRed (Jun 8, 2009)

Yes and yes. The tax slip box numbers take care of any mysteries for the relevant type of income


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## Eclectic12 (Oct 20, 2010)

AltaRed said:


> Flash said:
> 
> 
> > ... Do the T3's and T5's issued by brokers, take care which dividends are eligible and which are non-eligible and anything in between (capital gains, foreign dividends, foreign interest)?
> ...



For the types listed ... +1 (especially for A&W).


One caution though ... I have trusts that pay RoC. It does show up on the T3 form but it's up to the investor to update their records for the reduction in the cost (ACB).

Brokers have been getting better at automatically including this in their calculations but only since it's your money, the simple math to have an independent verification that too little tax is being paid is worth it IMO.


Cheers


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## Eclectic12 (Oct 20, 2010)

Davis said:


> ... Hm, nope. We used to have one dividend tax credit for dividends from both small and large corps, based on the small corp tax rates, so large corp dividends were over taxed. That was what led many corps to convert to income trusts. The higher dividend tax credit was introduced to try to fix that, and only large corp dividends are *eligible* for the higher tax credit.


Interesting ... all the talk at the time was more around how the same assets were trading at much higher price multiples. What as a corporation one looked for 10 to 20x was seen as "normal" to trade as a trust at 50x.




Davis said:


> ... And so we're clear, only dividends from taxable Canadian corporations are eligible for dividend tax credits (high or low rate). Dividends from foreign corporations are not eligible for any dividend tax credit.


The foreign corporations are what I've usually associated with "non-eligible" ... probably from learning about dividends back when there was one DTC rate.


Cheers


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## Davis (Nov 11, 2014)

CRA doesn't actually use the term "non-eligible". They call dividends that qualify for the lower DTC " dividends other than eligible dividends", which is no clearer at all. No wonder people get confused.


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