E&Y have analyzed Ontario tax rates as of 2010-3-31 and we may draw some conclusions from these data:
| Investors | Taxable Income | Marginal Rate on Interest | Marginal Rate on Dividends | Equivalency Factor |
| Widows & Orphans | $30,000 | 20.05% | 0.00% | 1.25 |
| Professionals | $75,000 | 35.39% | 14.03% | 1.33 |
| Plutocrats | $150,000 | 46.41% | 26.57% | 1.37 |
Equivalency factors have declined since my 2008 post on this topic; marginally for Plutocrats, Widows & Orphans, but more significantly for Professionals. The latter drop is from 1.42x to the current 1.33x.
Two nuances should be noted. Firstly, E&Y appears to have put a floor of 0.00% on the published marginal tax rate for dividends; in fact, the tax on dividends can be negative if the taxpayer has other income available to soak up the excess dividend tax credit. This will increase the equivalency factor for “Widows & Orphans”.
Secondly, if the taxpayer is subject to OAS clawback, the equivalency factor will decline by about 0.1. It should be noted that this figure is an extremely rough estimate and is based solely on the direct income tax effect – there may be other net-income-tested benefits to the taxpayer, such as drug plans, which will exacerbate the decline.
The tax equivalency factor for dividends will be declining more through 2012. The Canadian tax system is “integrated” which means the provinces and feds try to tax flows through corporations similar to individuals. Because Ottawa and Ontario are reducing corporate tax rates, the tax on dividends must increase in order for their total take to remain about the same.
Dividends are paid out of after-tax corporate profits. First the profit is taxed as a corporate profit and then the dividend is taxed as a dividend.
By 2012 the dividend gross up will be 38% (instead of 45% in 2009) and the top Ontario dividend tax factor will be 1.315 (down from 1.37 in James’ 2010 table for plutocrats). The corresponding top dividend tax rate will be 29.54%
Ref: http://www.pwc.com/ca/en/tax/budgets/2009/ontario.jhtml
Now: the big question is whether a 10% 3-year decline in top after-tax dividend income can explain the recent pref share market weakness!!?
See also the posts Federal Budget – Effect on Prefs and Dividend Taxation Changes.
[…] Equivalency factors have declined slightly since my 2010 post on this topic […]