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How to earn $50,000 in dividend income tax-free (in most provinces)

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The Financial Post has just published (in Thursday’s paper and online) my article headlined “You can earn $50K in tax-free dividends but there’s a catch: You can’t have a job.”

Can’t have a job, indeed, or a large pension or any other source of significant alternative income.

The article is based on a BMO Financial Group report (May 2016) entitled Eligible Dividend Income. It shows that at least eight provinces or territories make it possible to receive $51,474 a year in “tax-free” eligible dividend income, provided there are no other major sources of income, and notwithstanding any provincial health levies.

These include Alberta, British Columbia, New Brunswick, Ontario, Saskatchewan, the Northwest Territories, Nunavut and Yukon. It’s only $45,309 in Prince Edward Island, $35,835 in Quebec, $30,509 in Nova Scotia, $24,271 in Manitoba and just $18,679 in Newfoundland and Labrador.

BMO won’t update for 2017 until all 2017 provincial budgets are released. When it first began publishing the document for the 2012 tax year, the maximum amount of tax-free income on eligible dividends was $47,888 in Ontario and eight other provinces. The amount rose to $48,844 in 2013 and to $49,284 in 2014.

Dividend Tax Credit, Basic Personal Amount are keys

This low-tax phenomenon happens through a combination of the Basic Personal Amounts (which in 2016 makes the first $11,474 tax-free federally) and the 15.02% federal dividend tax credit on eligible Canadian dividends: Continue Reading…

Contrarian investing near market tops

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“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is.” —Warren Buffett, the Oracle of Omaha

Well, this is a pleasant surprise. Many stock market indices are hovering either at or near all time highs.

Successful investing near or at market tops is a skill worth having. Is it time to revisit your approach?

Most stock markets get their wings clipped periodically. Suddenly, interest in stocks has soared to lofty heights not seen before.

The question becomes “how does one invest in stocks now that most people are interested?” My view is that contrarian strategy delivers rewards in the long run.

Contrarian investors are very patient investors. They are not afraid to happily ‘zig’ when others want to ‘zag.’

Contrarians know that bulls and bears can swap chairs abruptly with little or no warning. Contrarians are content with either market direction.

Continue Reading…

Tax Deductions and Tax Credits: What’s the Difference?

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Canadian taxpayers have until May 1, 2017 to file their 2016 taxes. However, before the calendar turns over to a new year many Canadians want to know how best to maximize their tax refund or minimize what they owe the government.

The two main ways to reduce taxes owing are through tax deductions and tax credits. What’s the difference between a deduction and a credit? Let’s explore:

Tax Deductions

A deduction reduces your taxable income. The value of a deduction depends on your marginal tax rate. So, if your income is more than $200,000, you are taxed at the federal rate of 33 per cent and a $1,000 deduction would save you $330 in federal tax. On the other hand, if you were earning $30,000, you are taxed at the federal rate of only 15 per cent and a deduction of $1,000 would only save you $150 in federal tax.

An example of a tax deduction is your RRSP contribution.

Deductions checklist

  • RRSP contributions
  • Union or professional dues
  • Child care expenses
  • Moving expenses
  • Support payments
  • Employment expenses (w/ T2200)
  • Carrying charges or interest expense to earn business or investment income

Tax Credits

There are two types of tax credits: refundable and non-refundable. A non-refundable tax credit is applied directly against your tax payable. So if you have tax owing of $500 and get a tax credit of $100, you now only owe $400. If you don’t owe any tax, non-refundable credits are of no benefit. For refundable tax credits such as the GST/HST credit, you will receive the credit even if you have no tax owing.

Continue Reading…

On the Middle Class & paying one’s fair share of taxes

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By Tim Paziuk

Special to the Financial Independence Hub

The Liberal Government has stated it wants to build a strong middle class, but who comprises the middle class?  Mr. Morneau in his 2017 budget speech stated, “All Canadians must pay their fair share of taxes,” but what is a “fair share”?  Does fair share mean the total amount of taxes one pays as a percentage of their gross income?  Is this based on an annual consideration or a lifetime consideration?  Or does fair share mean positively contributing to the general revenue?

The answer to the first question is an ongoing contentious debate.  According to former Finance Minister Mr. Joe Oliver, the middle class could include households earning as much as $120,000.  Given research completed by MoneySense Magazine[1], the middle class could include households earning incomes ranging from $38,800 to $125,000 (average second, third, and fourth quintiles for Canadian households), but this varies considerably between Provinces and Territories, and even between cities.  But does owning a private corporation automatically exclude you from the middle class?  The continued witch hunt on private corporations by the Liberal Government would indicate this is the case since it directly contradicts their mandate to build a strong middle class.

Comparing a private-sector and public-sector worker

It is at this time I would like to introduce Sally.  Sally could be a physician or accountant, an engineer or architect, a therapist or life coach, or a hairstylist or clothing retailer.  Suffice to say that either out of choice or necessity, she is self employed.  Let’s make her a plumber who is in a position where it makes sense for her to incorporate because she can defer income within her corporation and income split with her spouse under present tax legislation.  Her spouse works part-time.  Their situation can be summarized as follows:

  • Sally’s taxable corporate income: $100,000
  • Spouse’s gross income: $25,000
  • Net income required to meet their lifestyle: $80,000
  • Spouse’s CPP income: $4,300

Continue Reading…

Men and women approach taxes & investing differently

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By Gennaro De Luca

Special to the Financial Independence Hub

Anyone who is in financial services, and especially wealth management, knows there are big differences between men and women in terms of how they invest. But what isn’t as well known is that there are also big differences between men and women when they do their tax returns.

I started working at a bank at the age of 19, have been in financial services since 1990, and have spent the past 18 years in wealth management. But I also have a company that specializes in doing tax returns for small businesses, families and students. All this experience has provided a lot of insight into how men and women differ when it comes to financial matters.

Let’s first look at tax returns. Nine times out of ten it is the woman who takes the bull by the horns to get the family’s taxes done. Women tend to be more involved and are much more apt to ask questions of their accountant or tax preparer. Men may not ask any questions at all; they just hand over their documents and see you later.

What kind of questions am I talking about? Women want to know things like this:

  • What kind of tax credits are we eligible for?
  • Are there any government benefits we are eligible for?

That latter point is especially important for women who have small children. Indeed, many young families are really squeezed nowadays, so every opportunity for a tax break is vital.

Here is a perfect example from a client that illustrates what I mean. The woman is a teacher who could claim certain expenses for driving her car to work. Her husband is not a teacher, but does work for an employer. She asked us if her husband is also eligible for this same deduction because, like her, he drives a car for his employer and has lots of expenses.

As it turned out, he was eligible for what is known as a T2200, which is a declaration of conditions of employment –- effectively work-related expenses –- and in his case it meant deductions of $10,475, which resulted in a tax saving of over $3,000 on his tax return. But if his wife had never asked the question, none of this would have been claimed.

Men are more resistant to change

Another difference with doing taxes concerns technology. Today more than 80% of tax returns in Canada are done digitally, Continue Reading…