Federal Budget – Effect on Prefs

With a hat-tip to the Financial Webring, we can look at a story in the National Post:

Canadians may be wise putting dividend-paying stocks into their TFSAs. While the government announced last October it would slash corporate income tax rate to 15% by 2012 from 19.5%, individual investors will be making up some of that lost revenue.

The average rate investors will pay on dividend income at the top marginal tax rate of 46% will rise to 25.3% by 2012 from 18.5% in 2008.

Marginal rate of dividends increasing? What will that do?

Old / New Regimes for
Dividend Tax Credit
and Gross-up
  Old New
Interest Income $1.00 $1.00
Tax on Interest $0.46 $0.46
Net Interest After Tax (A) $0.54 $0.54
Dividend Income $1.00 $1.00
Tax on Dividend $0.185 $0.253
Net Dividend After Tax (B) $0.815 $0.747
Equivalency Factor (=B/A) 1.509 1.383

To check these figures … If we receive $1.509 in interest and pay 46% tax, or $0.694, we’re left with $0.815, which is the same as the net left after tax from dividends of $1.00 under the old regime, so that’s OK.

If we receive $1.383 in interest and pay 46% tax, or $0.636, we’re left with $0.747, which is the same as the net left after tax from dividends of $1.00 under the new regime, so that’s OK.

I don’t know where the Post got their figures from. The equivalency factor in Ontario is currently 1.40, not 1.509 as per their figures; I use a marginal rate on dividends of 21.0% and 46.4% on interest.

Throughout the 1990’s, I used 48.8% on income and 32.9% on dividends, which gave an equivalency factor of 1.311.

Before opining on the effects of the change, I want to know just what the change is! I’ll wait for the accountancy firms to crunch the numbers, then pontifficate.

Update: KPMG notes:

Dividend tax credit (DTC) For 2010 and later years, the dividend gross-up factor and DTC will be adjusted in increments to reflect the corporation tax reductions to 15% in 2012 introduced in the October 30, 2007 mini-budget (for details on the corporate tax cuts, see TaxNewsFlash-Canada 2007-28, “Highlights of the 2007 Federal Mini-Budget”).

The KPMG report on the fall 2007 mini-budget states:

The mini-budget documents also say that, in light of the corporate tax rate cuts, the federal government will consider corresponding changes to the enhanced dividend tax credit for eligible dividends. The enhanced credit is designed to ensure that the combined corporate and personal tax rate on dividends from large corporations is comparable to the rate applying to other income. The credit was established based on the total average federal-provincial corporate tax rates that were expected to apply in 2010.

Update, 2008-2-29: Follow up article, with projected rates is Dividend Taxation Changes.

One Response to “Federal Budget – Effect on Prefs”

  1. […] So … the estimate is that the equivalency factor is going to revert to approximately what it was in the nineties. […]

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