Here are the rates from the E&Y Tax Calculator, as updated to include legislation to October 22, 2008. There has been a marginal change since my last post on the topic.
Clawbacks are not included; I am hopeful that at some point I will be able to get some authoritative data on the effects of clawbacks, but have not found anything credible … please contact me if you do know of any credible public sources!
| Investors | Taxable Income | Marginal Rate on Interest | Marginal Rate on Dividends | Equivalency Factor |
| Widows & Orphans | $30,000 | 20.06% | 0.00% | 1.27 |
| Professionals | $75,000 | 32.50% | 4.40% | 1.42 |
| Plutocrats | $150,000 | 43.70% | 18.47% | 1.45 |
Look at those rates, eh? The choice between interest and dividends is roughly the same as in Ontario at all income levels … but I look at the rate on dividends for “professionals” and I just can’t believe my eyes!
The comments to the Ontario update included some discussion of the calculation of the equivalency factor in the presence of the OAS clawback.
I decided to stop working and to move to the west coast to escape the Calgary shovel-melt-freeze cycle. I was blown-away when I started playing around with the tax implications of portfolio building as a BC resident. Dialing up $75,000 of dividend income in the absence of employment income can be done almost completely without tax. I haven’t looked into clawback, I’m years from that and undoubtedly the playing field will change before I get there.
But I certainly have a new-found interest in pref shares and have signed up for your PerfLetter. Keep the recommendations coming!
I just ran a simulation with Quicktax (not sure if that’s “authoritative”) – plugging in OAS on top of $75k in dividend income in BC. The OAS is completely clawed-back in that simulation.
I have some unauthoritative data that suggests that the effect of clawback on the marginal dividend rate is at a maximum at in the $37,000 – $63,000 range.
What taxes are payable according to Quicktax in the three scenarios:
In the absence of other reported taxable income you can have significant eligible dividends and pay no “regular” tax. However to complicate the calculations you cannot ignore the “minimum tax” which may apply once you are over the basic exemption of $40,000. I just ran a quick calculation for both BC and Ontario and some minimum tax will be owing at the $75K level of eligible dividends. Note this tax is recoverable in following seven years when regular tax exceeds minimum tax. Anyone interested can wade through form T691 – lots of fun!
Re the marginal rates and the classification of “professionals” – not sure why that classification exists – everyone at that income level gets that rate
Re the marginal rates and the classification of “professionals” – not sure why that classification exists
It’s just a mnemonic.
Base case = Pension income $40,000 = Payable $6888.96
Base case + $1000 interest income = Payable $6995.46
Base case + $1000 Dividend income = Payable $6685.80
Edmit – not sure about “minimum tax”, but Quicktax hands me a total tax bill of $440 on dividend income of $75,000 – no other income.
No mention of “minimum tax” in the Quicktax program in this case…
But … but … this implies that the marginal tax on $1000 interest is $106.05, for a marginal rate of 10.65%, and that the marginal tax on $1000 dividend is (203.16) for a marginal rate of (20.32%).
Something must be wrong!
Yeah, you’re right – I made an error…
Here’s the corrected (yet same character) numbers:
40k Pension = Tax of $6331.86
40k Pension + 1k interest = Tax of $$6638.36
40K Pension + 1k dividends = Tax of $6328.70 due to Provincial Div credit of $120 and Fed Div credit of $189.66. These amounts, totalling $309.66 make up the difference between the tax bill on $1k of int income vs. $1k of div income.
Unless Quicktax is having a bad day, this seems like a gift…
The E&Y marginal rates on dividends are wrong unfortunately.
The marginal rate in BC at $30k is -15.5%. Between $35k and $70k, it’s still negative around -2%. At the $75k mark, it’s slightly positive. All this ignores AMT, which kicks in at $49.6k and imposes an immediate marginal rate of 20.1% for those relying entirely on dividend income.
Joe Clarke – re Quicktax and minimum tax calculation – have to be careful as some of these programs are not sophisticated enough to have the minimum tax calculations built in – for fast calcs I use a program called SuperQuick which ignores AMT considerations – if I think AMT might apply I have to use the more robust TaxPrep which covers all situations
This is what really bugs me about tax discussions. One would think that computing marginal rates would be straightforward … but I suppose accountants grumble the same thing about yield on preferred shares, so every man to his specialty!
A lot of the marginal rate depends on what assumptions are made – couple? family? other deductions? – but I consider it totally wild that it is even possible to get a negative marginal rate on dividends!
“but I consider it totally wild that it is even possible to get a negative marginal rate on dividends!”
It actually makes sense. The DTC is meant to refund taxes already paid at the corporate level. If a person’s marginal tax rate is lower than the corporate rate, for that person the marginal tax rate on dividends SHOULD be negative.
Not to continue this AMT discussion ad naseum, but this is new ground for me, so I’ve been doing some checking. In Quicktax the tax bill includes a provision for AMT, in fact the entire Fed Tax payable in the examples I’ve given above (On $40k income) represents AMT, which is eligible for carryforward against future taxes (on earned income I suppose).
In the scenario of interest to me, $75k of dividend income attracts a AMT bill of $318.62 and provincial tax of $121.08 for a total of $439.70. At $75k the marginal rate on interest and further dividend income would be 21% and 14% respectively.
[…] Equivalency factors have declined marginally since my 2008 post on this topic. […]