The dividend tax credit can be a useful tool for investors looking to reduce the taxes they pay on their investments, especially at lower tax brackets. But it only applies to dividends from Canadian companies, and may interact with your other holdings in ways that minimize some of its benefits. John Horwood, director of wealth management at Richardson GMP in Toronto, sat down with The Financial Pipeline to discuss what investors need to consider when it comes to the dividend tax credit.
Dividend tax credits are limited to basically Canadian companies, so the tax credit is not available to the U.S. or overseas companies, which is unfortunate. In fact, dividends received from companies outside of Canada are penalized. So the taxes are quite nasty, which is unfortunate for investors, but that’s basically the way it works. Otherwise, the main issue around the dividends and the dividend tax credits is the interaction with the other investments that you have. So they may be very attractive at a relatively low taxable income level, but the moment you pile on income from a retirement income fund, or other investment income, or other income, then the benefits can soon diminish quite quickly once you get up in the higher tax rates. Then the real benefits disappear and it starts to make more sense to go to return of capital structures or capital gains structures where there is no limit on the income.