Now is the perfect time for clients to review dividend tax rules that have recently changed or that will do so in the coming year, according to Toronto-based BMO Nesbitt Burns Inc.
“It’s important for investors to be aware of the types of investment income their portfolio earns and how it’s taxed,” said John Waters, vice president, head of tax & estate planning, wealth planning group, BMO Nesbitt Burns, in a statement. “The changes in dividend income taxation over the last few years provide another opportunity to review investments in order to maximize returns.”
Below are four points about dividends BMO says clients should keep in mind:
1. Lower gross-up for non-eligible dividends
Starting in 2014, the effective tax rate of non-eligible dividends will increase as the current 25% gross up is reduced to 18%, as announced in the 2013 Federal Budget, and the corresponding dividend tax credit moves from 13.33% to 11.02%
2. Widening rate gap between regions
Eligible dividends are taxable dividends paid out after 2005 by a Canadian corporation to an investor who is a Canadian resident. In 2013, eligible dividends incur a lower top tax rate than capital gains in the Yukon and Alberta. BMO notes that the top tax rate differential between eligible dividends and capital gains has increased even more in Manitoba, Ontario, Quebec, Nova Scotia, Prince Edward Island and Nunavut.
3. Dividends and income-tested benefits
Clients in lower marginal tax brackets should also consider that the impact of their taxable income from the dividend gross-up can negatively affect income-tested benefits and tax credits, such as the Old Age Security (OAS), Guaranteed Income Supplements (GIS) and other provincial benefits.
4. “Tax-free” dividend amounts
The dividend tax credit can help clients in lower marginal tax brackets, according to BMO, as individuals with no other source of revenue can receive significant amounts of dividend income without incurring income tax.