IBM pays a reasonable dividend, and I think it is fairly secure. If I sold,
after paying the capital gains, I’d have a lot less to invest. To get the
same total income, I’d have to probably take more risk, but if I invested
in Canadian equities because of the better tax treatment, I would probably
be further ahead after taxes.
Some very rough numbers. If I had $100,000 in IBM shares and got US$3,500
in dividends after the withholding tax, I might end up with US$3,000 or
C$4,000. If I sold, after paying the capital gains tax, I might have
US$75,000 to invest, or C$100,000. Because of the lower tax rate on
Canadian dividends, maybe I’d only need $3,500 in dividends to net $3,000
after tax. So if IBM was paying a dividend of 3.5%, to net the same after
taxes from Canadian dividends I might only need a Canadian equity paying
3.4%. Not quite as risky as I first thought, in fact less. As I said, all
very rough numbers, but you get the idea. How do I easily determine the
actual numbers? – Robert F.
– Well, let’s break this down. Let’s assume you own 590 shares of IBM,
which is worth about US$100,000 at the price at the time of writing. The
stock pays an annual dividend of $5.60 so your shares are generating
US$3,304 annually. That’s a yield of 3.3%.
Withholding tax takes 15%, leaving you with US$2,808.40, or C$3,741.55. Now
let’s assume your annual income is $75,000. The EY online personal tax
calculator shows that if you are a resident of Ontario, you’ll pay tax at a
rate of 31.48% on those dividends, leaving you with C$2,563.71.
Suppose you sell the IBM shares as you suggest. We don’t know what your
cost base is, but let’s assume the stock has doubled in value. You have a
capital gain of US$50,000, or C$66,613.50. Only half is taxable, so your
actual tax rate on that amount is 15.74%. You are left with C$56,128.54.
Add that to your untaxed profit of C$66,613.50, and you have a total of
C$122,724,03 to invest.
That would buy you a little over 2,000 shares of, say, BCE at the current
price. Those shares pay a dividend of C$2.87 per year, so you would receive
income of $5,739.20 annually. Your tax rate would be 8.92% on eligible
dividends, leaving you with $5,227.26 in your pocket.
As you can see, using those numbers and a $75,000 income, you are much
better off with BCE from an income perspective. However, the figure will
change, depending on your income level and province of residence. A Quebec
resident with $150,000 in income will pay tax on eligible Canadian
dividends of 35.22% and a capital gains rate of 24.99%.
Consult a financial planner to work on your personal numbers. – Gordon Pape
If you have a money related question send it to me at
. Write “Fund Library Question” in the subject line. I can’t guarantee
a personal response, but I’ll include the most interesting ones in this
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website.
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Notes and Disclaimer
© 2017 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
BUILDING WEALTH WITH GORDON PAPE