A hidden tax in the new Dividend Gross Up?I thought that I should post this on the BCE BullBoards since a lot of their investors rely on the Dividend and Interest payments.
Is there a hidden tax in the new Dividend gross up of 45%?
Dividend Income or Interest Income, which is better?
Comparing the taxation of Dividend Income (2005 & 2006) to Interest Income.
We will use Interest Income as a benchmark.
We will use rounded numbers and Alberta and Fed Tax rates.
Tax brackets $1 to $36,000 @ 25% (15% Fed + 10% Alberta).
$36,001 to $72,000 @ 32% (22% Fed + 10% Alberta).
Example A. Interest Income:
$36,000 - 25% tax (36,000 x 25% = 9,000)
-$9,000
$27,000 will be the benchmark.
Example B. Dividend Income 2005:
The Dividend gross up was 25%
The Dividend Tax Credit (DTC) was 13.33% Fed + 6.67% Alberta = 20%
To be taxed at $36,000 you would have received $28,800 in Dividends.
$28,800 x 1.25 Dividend gross up = $36,000 of taxable income
$36,000 x -25% tax (36,000 x 25% = 9,000) = -$9,000
$36,000 x +20% DTC (36,000 x 20% = 7,200) = +$7,200
You will pay $1,800 more in taxes (-9,000 + 7,200 = -1,800).
You received $28,800 in Dividends minus $1,800 in taxes owed = $27,000.
This is the same as Example A, Interest Income.
Example C. Dividend Income 2006:
The dividend gross up was 45%
The dividend tax credit (DTC) was 18.5% Fed + 6.5% Alberta = 25%
To be taxed at $36,000 you would have received $24,800 in Dividends.
$24,800 x 1.45 Dividend gross up = $36,000 of taxable income
$36,000 x 25% tax (36,000 x 25% = 9,000) = -$9,000
$36,000 x 25% DTC (36,000 x 25% = 9,000) = +$9,000
The result is zero taxes owed.
You received $24,800 in Dividends owe zero taxes is $24,800
This compared to the benchmark of $27,000 - $24,800 = -$2,200 difference.
This is also the same difference compared to Example B, Dividend Income 2005.
What happen to the missing $2,200?
So, in Example C, Dividend Income 2006: You received $24,800 and taxed at $36,000. Then, the real tax rate is 31% not 25% even though you are still in lowest tax bracket.
Example D, $28,800 of Dividend Income 2006:
$28,800 o Dividend Income:
-$24,800 will be the lower tax bracket of 25%
$4,000 will be in the next tax bracket of 32% (22% Fed + 10% Alberta)
The first $24,800 will have zero taxes owed as in Example C.
$4,000 x 1.45 = $5,800 taxable income @ 32% (5,800 x 32% )= -$1,850
$5,800 x 25% DTC (5,800 x 25%) +$1,450
Net is -$1,850 + $1,450 = -$400 owed in taxes
So, you received $28,800 in Dividend Income minus $400 taxes owed =
$28,400.
This compared to $41,800 of Interest Income:
$36,000 will be taxed @ 25% -$9,000
$5,800 will be taxed @ 32% = -$1,850
$41,800 - $9,000 -$1,850 = $34,650
Using this, you are better off with Interest Income or Dividend Income 2005.
The new Dividend gross up of 45% will give less net income. You will be taxed 6% higher in each tax bracket as well as the amount of taxable room.
This will hurt Seniors more because of the OSA crawl back.
I hope this isn't the tax fairness that Mr. Flaherty wanted when he decided to kill the Income Trusts in 2011?
A simple fix is to go back to the old Dividend Gross Up of 25% and
Dividend Tax Credit of 20%.
Please forward this to anyone who own Dividend Stocks.
Thanks