# Tax Efficiency in Non-Registered Account



## JohnnyD (Apr 10, 2014)

Hello,

Thanks to Covid-19 I have really amped up my savings rate and have almost maxed out both my RRSP and TFSA accounts.

I am just curious as to how things change once dividend investors begin to invest in their non-registered account? Do they generally move towards a more capital gains focus to save on taxes or do they continue investing in dividends with a more Canadian dividend stock focus? I realize all these things depend on so many different factors (age, marginal tax rate, etc).

Just curious as to which route people took and why.

Thank you all in advance!


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## newfoundlander61 (Feb 6, 2011)

In my case as I am receiving a Denfined Benefit Pension Plan since I left the military in 2000, I never bothered to open an RRSP. Why, well this may not sound like the best route but I am treating my DBPP sort of like an RRSP. Decided tthat both would not be necessay so instead my wife and I have a TFSA each and each Jan we max it out by transferring the money from our non-reg account. The non-reg invested in a range of dividend paying stocks for both dividend income and growth. Our non-reg only holds canadian stocks, any thing like REITS etc are in our TFSA's.


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## MrMatt (Dec 21, 2011)

Fixed income in non-registered
1. Easy to track and calculate.
2. Lower returns == lower taxes


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## Numbersman61 (Jan 26, 2015)

I have no pension so all my income is from investments and RRIF payments. RRIF owns bank Reset preferreds and ETF’s. Investments in non registered accounts are all in Canadian stocks paying dividends.


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## OptsyEagle (Nov 29, 2009)

Wow. You have to look quite closely to notice that Newfoundlander61 is not the same as Numbersman61. I read Newfie61's post about his defined pension plan and then read numbers61 saying he had no pension and it took quite a few up and downs to notice they are not the same poster. I will have to keep that in mind. 

Perhaps it's just too early in the morning for me. My mind must still be on the old daylight losing time.


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## Eclectic12 (Oct 20, 2010)

I started with RRSP then within ten years, a non-registered account.

I have never worried about capital gains versus eligible dividends as there are whole sectors where going the capital gains route means one is going with a just starting out company versus a well established one. For example, where one likes Canadian banks, which one would you buy that does not pay eligible dividends?

Another factor is that my crystal ball has never worked well enough to be sure of which ones will have the highest growth over the long term.


Since you are getting close to starting on a non-registered account, I'd recommend making sure you are familiar with the range of tax implications. A capital gains only investment is on the simple end while a Canadian domiciled ETF is on the more complicated end.








TaxTips.ca - Tax treatment of income from exchange traded funds


TaxTips.ca - Tax treatment of income from investments in exchange traded funds (ETFs); How to calculate the capital gain or loss on ETFs.




www.taxtips.ca





Income paid should be on either a T5 or T3 slip so it's more about the cost base record keeping and updating when events occur that change the cost base.

FWIW, it was a pain when I discovered I had mistakenly assumed a REIT pays only eligible dividends like RY or EMA, years after buying, 
Now that I understand it and have a system to check my broker's numbers, it is tedious but easy.


Cheers


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## Numbersman61 (Jan 26, 2015)

OptsyEagle said:


> Wow. You have to look quite closely to notice that Newfoundlander61 is not the same as Numbersman61. I read Newfie61's post about his defined pension plan and then read numbers61 saying he had no pension and it took quite a few up and downs to notice they are not the same poster. I will have to keep that in mind.
> 
> Perhaps it's just too early in the morning for me. My mind must still be on the old daylight losing time.


Newfoundlander61 appears to live in Ontario. I am a proud Calgarian - started using my user name some 18 years ago when I started posting on various bulletin boards.


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## Numbersman61 (Jan 26, 2015)

My investments in non registered accounts all qualify for the Dividend Tax Credit which is important to me as I consider it to be most tax efficient. In order to compare dividend income to interest income on an after tax basis, I believe you should multiply the dividend yield by 1.3 to compare interest income yield. 
Of course, the dividend gross up does affect the OAS Clawback.


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## Eclectic12 (Oct 20, 2010)

I'm not so sure that multiplying by 1.3 gives the "after tax" for eligible dividends.

Won't that be putting both interest and the eligible dividends on a pre-personal tax basis, where taxes and credits have not been applied?


Cheers


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## MrMatt (Dec 21, 2011)

Numbersman61 said:


> My investments in non registered accounts all qualify for the Dividend Tax Credit which is important to me as I consider it to be most tax efficient. In order to compare dividend income to interest income on an after tax basis, I believe you should multiply the dividend yield by 1.3 to compare interest income yield.
> Of course, the dividend gross up does affect the OAS Clawback.


It's the most tax efficient way to get the income.

But lets look at a bank 4% yield vs a GIC at 1% yield.
you're going to lose more to taxes with the dividend, once you pass a certail income level (ie 79k in this example)










TaxTips.ca - Ontario 2022 & 2023 Tax Rates & Tax Brackets


TaxTips.ca - Ontario tax rates for 2022 and 2023 for eligible and non-eligible dividends, capital gains, and other income.




www.taxtips.ca


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## Numbersman61 (Jan 26, 2015)

TaxTips.ca - Tax Comparison Investment Income 2020 - Dividends vs Interest


TaxTips.ca - Comparison of taxes payable for 2020 by province on eligible dividends, non-eligible dividends, and interest income.




www.taxtips.ca




my recollection is that at one time a 5% dividend was the equivalent of 6.5% interest on an after tax basis. Of course, the rate depends on the Province of residence. You will note from the attached table that $50,000 in eligible dividend income results in no combined federal and Alberta tax payable. The same amount in interest income results in $8,659 combined federal and Alberta tax.


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## GreatLaker (Mar 23, 2014)

I would not change the overall portfolio design just because registered accounts are full and you need to open a non-registered account. Design your portfolio and asset allocation according to your investing strategy, risk tolerance and timeline.

A lot of good quality stocks provide both capital gains and dividends, so it's hard to draw a definitive line between them. But assuming you are holding individual stocks, some that do pay dividends and some that don't, you can tactically choose which stocks go in which account for better tax efficiency.

On US and foreign stocks, dividends are less tax efficient than capital gains. Capital gains are taxed at half your marginal rate, whereas foreign & US dividends are taxed at full marginal rate every year. So it's more tax efficient to place non-dividend payers in the non-registered, and keep dividend payers in registered accounts. Plus dividends are taxed every year, whereas capital gains are only taxed when sold, deferring taxes and giving investors control over when to incur those taxes.

Canadian dividends are more complex, because dividend tax rates vary so much by income level. You did not say your location, so I'll use my location which is ON. Tax on dividends is negative up to $49k of income. Up to $98k income, dividends are taxed at lower rate than capital gains, so you would preferably put dividend payers in non-registered and non-dividend payers in registered. Above $98k income dividend tax rates are higher than capital gains, so put non-dividend payers in taxable account and dividend payers in registered accounts.

The problem with the above is your income will fluctuate, probably rising as you get older, then drop when you retire. And you cannot just move money between registered and taxable accounts as your income changes, without incurring significant taxes. And a lot of good stable companies pay dividends. So you may get some benefit from implementing what I described above, but don't hold a non-optimal portfolio just to try and eke out some questionable tax savings.


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## OneSeat (Apr 15, 2020)

I think I knew what you said but thanks for confirming it so neatly and clearly.
But one question -



GreatLaker said:


> Tax on dividends is *negative* up to $49k of income.


 - did you mean *zero* rather than negative?


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## JohnnyD (Apr 10, 2014)

Thank you everyone for this great discussion. It gives me lots of insight into everyone's thinking.

I agree that it makes more sense to keep on doing what I am comfortable with. Perhaps when the opportunity arises I can invest in more low yielding stocks like MRU or CNR to sort of minimize taxes but again, when I reach retirement one day I may be forced to sell these investments for better yields, resulting in capital gains. It's really a no-win situation. Ideally, I think I would prefer to hold on to my investments (as long as no dividends are cut). I am in Ontario by the way.


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## GreatLaker (Mar 23, 2014)

OneSeat said:


> I think I knew what you said but thanks for confirming it so neatly and clearly.
> But one question -
> 
> 
> - did you mean *zero* rather than negative?


There can actually be a negative tax rate on dividends. It is non-refundable, which means it can offset taxes due on other income, but won't result in a refund if there is no other income. See this web page for the tax rate on eligible dividends in ON:
TaxTips.ca - Ontario Personal Income Tax Rates 

Or see this page for a deeper explanation:
TaxTips.ca - Negative Tax Rate Eligible Dividends 

Great for some moderate income taxpayers, or retirees with a mix of dividends and other income sources!


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## Tostig (Nov 18, 2020)

Firstly, if you own dividend stocks in your taxable account, you won't want to enroll them in DRIPs. The ACB may be a nightmare if you're buying and selling periodically.

Dividends may be a good idea especially if you're holding a lot of cash that you probably won't need for a long time because high interest in a savings account just won't keep up with inflation and the amount you have to lock-in for GICs to pay a decent interest is just unbelievably high to be worth the effort.

If you don't need the cash for a long time, it's probably a good idea to hold growth stocks or ETFs that don't pay or pay very little distributions. This may be relevant if you are setting aside cash or investments for your children or grandchildren. You don't want to pay tax on dividends that is intended for them.


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## Eclectic12 (Oct 20, 2010)

Tostig said:


> Firstly, if you own dividend stocks in your taxable account, you won't want to enroll them in DRIPs. The ACB may be a nightmare if you're buying and selling periodically ...


Depends ... four updates a year to check that the broker's cost base remains correct, I don't see as a big deal.

Others aren't as comfortable with spreadsheets or sites like Adjusted Cost Base.ca - The Free and Easy Way to Calculate ACB and and Track Capital Gains so they intentionally skip it. Just like some of them skip tax software for the paper, now PDF tax forms.


Cheers


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## Spudd (Oct 11, 2011)

GreatLaker said:


> There can actually be a negative tax rate on dividends. It is non-refundable, which means it can offset taxes due on other income, but won't result in a refund if there is no other income. See this web page for the tax rate on eligible dividends in ON:
> TaxTips.ca - Ontario Personal Income Tax Rates
> 
> Or see this page for a deeper explanation:
> ...


 Last year I had household income of around 30k, due to a part-time job I got to pass the time during covid, LOL. All my dividends are decreasing my refund because my CWB is getting impacted due to the higher household income they cause. So in theory, yes, it should be negative, but if you have employment income in a low bracket, the dividends may actually be taxed via the CWB.


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## bgc_fan (Apr 5, 2009)

Eclectic12 said:


> I'm not so sure that multiplying by 1.3 gives the "after tax" for eligible dividends.
> 
> Won't that be putting both interest and the eligible dividends on a pre-personal tax basis, where taxes and credits have not been applied?
> 
> Cheers


Hmm... I recall going through the numbers some years ago, and at the time, because of the dividend tax credit, you could essentially get $25k in dividends without paying federal taxes (this was years ago, so I haven't updated, or gone through the exercise again).

The main drawback is that your grossed up income is used for OAS/GIS thresholds for clawback.


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## GreatLaker (Mar 23, 2014)

Spudd said:


> Last year I had household income of around 30k, due to a part-time job I got to pass the time during covid, LOL. All my dividends are decreasing my refund because my CWB is getting impacted due to the higher household income they cause. So in theory, yes, it should be negative, but if you have employment income in a low bracket, the dividends may actually be taxed via the CWB.


Good point. Thanks.

The tax system is vexingly complicated especially at certain income levels where specific types of income can result in reduction of benefits like OAS, GIS, CWB, GST Credit and Trillium Benefit. A lot of those benefits and credits are aimed at low-income folks, which the bureaucrats that define the tax system feel are incompatible with dividends.


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## Retiredguy (Jul 24, 2013)

bgc_fan said:


> Hmm... I recall going through the numbers some years ago, and at the time, because of the dividend tax credit, you could essentially get $25k in dividends without paying federal taxes (this was years ago, so I haven't updated, or gone through the exercise again).
> 
> The main drawback is that your grossed up income is used for OAS/GIS thresholds for clawback.


Dividends are not a drawback for OAS.
The clawback begins at 79845. (for 2021)
Which would you rather have. 80k e/dividends + 7380 OAS or 80k interest + 7380 OAS. Amount of money in after tax is way more with dividends. Yes divs are grossed up but they also get a tax credit. 

For GIS I agree, but I expect very few GIS recipients have much in the way of divs.


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## newfoundlander61 (Feb 6, 2011)

Numbersman61 said:


> Newfoundlander61 appears to live in Ontario. I am a proud Calgarian - started using my user name some 18 years ago when I started posting on various bulletin boards.


Yep, i stayed in eastern Ontario when I retired from the military. But always look forward going back to my birthplace in Nfld each summer. Never made it last year to see my family so really hoping after my 2nd vaccine in the future I can make it done this late summer of even early fall if needed.


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## Numbersman61 (Jan 26, 2015)

Retiredguy said:


> Dividends are not a drawback for OAS.
> The clawback begins at 79845. (for 2021)
> Which would you rather have. 80k e/dividends + 7380 OAS or 80k interest + 7380 OAS. Amount of money in after tax is way more with dividends. Yes divs are grossed up but they also get a tax credit.
> 
> For GIS I agree, but I expect very few GIS recipients have much in the way of divs.


I no longer am concerned about the clawback. It is what it is and I just ignore it.


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## bgc_fan (Apr 5, 2009)

Retiredguy said:


> Dividends are not a drawback for OAS.
> The clawback begins at 79845. (for 2021)
> Which would you rather have. 80k e/dividends + 7380 OAS or 80k interest + 7380 OAS. Amount of money in after tax is way more with dividends. Yes divs are grossed up but they also get a tax credit.
> 
> For GIS I agree, but I expect very few GIS recipients have much in the way of divs.


For the clawback, and gross-up (15%), isn't it more like $69.5k dividends + $7380 OAS?

Just using this site for quick and dirty tax calculations (Ontario): Canada income tax calculator 2020 | TurboTax® 2020 Canada

$69.5k dividends is $3,856 in taxes, so a net of $73,024.
$80k Interest is $17,159 in taxes, so a net of $70,221.

So, yes, dividends wins out.

Edit: FWIW it looks like you can make up to $53k in dividends without paying federal tax.


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## Numbersman61 (Jan 26, 2015)

bgc_fan said:


> For the clawback, and gross-up (15%), isn't it more like $69.5k dividends + $7380 OAS?
> 
> Just using this site for quick and dirty tax calculations (Ontario): Canada income tax calculator 2020 | TurboTax® 2020 Canada
> 
> ...


Actually, the gross up for eligible dividends is 38%; for ineligible dividends, the gross up is 15%.


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## Retiredguy (Jul 24, 2013)

bgc_fan said:


> For the clawback, and gross-up (15%), isn't it more like $69.5k dividends + $7380 OAS?
> 
> Just using this site for quick and dirty tax calculations (Ontario): Canada income tax calculator 2020 | TurboTax® 2020 Canada
> 
> ...


Doesn't matter where the clawback begins at . If one was in clawback territory and it was dividends versus interest (or regular income) causing it you'd always end up with more after tax income with e/dividends.

Try 60K regular income plus 30k divs plus 7380 OAS versus 90k regular income plus 7380 OAS. I use taxtips.ca calculator and it will also show how much is clawedback. Yes more is OAS clawbacked with divs but because of the way divs are taxed you'd always end up with more aftertax. The divs are grossed up x 1.38 but they also get a tax credit of 15.0198% of the grossed up amount. As it says on the taxtips site people should not avoid e/dividends because of the clawback.


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## bgc_fan (Apr 5, 2009)

Numbersman61 said:


> Actually, the gross up for eligible dividends is 38%; for ineligible dividends, the gross up is 15%.


So, then it should be $58k. $1455 in taxes gives you a net of $64k.



Retiredguy said:


> Doesn't matter where the clawback begins at . If one was in clawback territory and it was dividends versus interest (or regular income) causing it you'd always end up with more after tax income with e/dividends.
> 
> Try 60K regular income plus 30k divs plus 7380 OAS versus 90k regular income plus 7380 OAS. I use taxtips.ca calculator and it will also show how much is clawedback. Yes more is OAS clawbacked with divs but because of the way divs are taxed you'd always end up with more aftertax. The divs are grossed up x 1.38 but they also get a tax credit of 15.0198% of the grossed up amount. As it says on the taxtips site people should not avoid e/dividends because of the clawback.


1. Taxes owed $13,328 - with gross-up $101.4k income, so $3,210 recovery: Total $16,538.
2. Taxes owed $19,321 - with $90k income, so $1,500 recovery: Total $20,821.

Any issues with my calculations?

Edit: I'm aware that you shouldn't let the tax tail wag the dog, and at the end of the day, you want as much cash as possible. However, people do need to be aware that there are some implications (reduction in OAS) so that they aren't surprised.


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## Retiredguy (Jul 24, 2013)

bgc_fan said:


> So, then it should be $58k. $1455 in taxes gives you a net of $64k.
> 
> 
> 
> ...


Didn't check 1&2 but they confirm my point and we agree. 

Unfortunately imo most people just hear that divs are to be avoided because of the clawback when in fact they're not a drawback at all.


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## Retiredguy (Jul 24, 2013)

Numbersman61 said:


> I no longer am concerned about the clawback. It is what it is and I just ignore it.


I (we) have never applied for OAS. Grateful that I live in Canada and that I've been fortunate to be able to put my wife and I in a position where neither of us will ever be eligible. Also of course don't get GIS, the seniors tax credit or any GST credits etc. But I have a sibling who gets it all and I'm happy that he gets it. His situation is a personal reminder why we need these programs.


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