Canadians who are approaching or have reached retirement age often look for yield investments that can pay a monthly or quarterly cash distribution to provide them with enough cash to live on without having to continually sell a portion of their investments. In previous months, we looked at some of the more innovative yield investments, such as real estate investment trusts and unlisted mutual fund trusts. However, a more conventional yield investment – dividend paying shares of Canadian public companies – should not be overlooked, particularly for non-registered investment accounts.
The reasons are simple: both corporate and dividend income tax rates in Canada have been decreasing. The federal corporate tax rate is scheduled to be reduced to 15% by 2012, while provincial corporate tax rates vary from 10% to 16%. The resulting combined corporate tax rates of 25% to 31% (depending on the province(s) in which the Canadian public company carries on business) are much lower than they were in the past, providing corporations with more after-tax income that they can reinvest in the business or distribute to shareholders as dividends. Either way, investors benefit.
Canadian investors also benefit from an attractive personal income tax rate for eligible dividends received on Canadian public company shares. Even for individuals in the highest tax bracket, the 2011 combined (federal and provincial) tax rate on eligible dividends ranges from a low of under 18% in Alberta to a high of under 36% in Nova Scotia. In contrast, the 2011 combined tax rate on ordinary income ranges from 39% in Alberta to 50% in Nova Scotia.
Unfortunately, it is not as tax efficient to hold dividend paying shares in registered accounts such as RRSPs and RRIFs. Although a dividend is received tax free while shares are held in a registered account, it loses its character as a dividend when it is withdrawn from the account and, instead, is taxed as ordinary income to the investor.
Large corporations, such as banks and utilities, are more likely to pay regular dividends than smaller enterprises. The dividend rates are typically quite modest, in the 2% to 4% range. However, these companies are generally lower risk investments and, accordingly, can be appropriate for retirement savings. Also, since the shares are publicly traded, there is an opportunity for the share price to appreciate, thereby enhancing the overall return on investment.
In summary, Canadian public company share investments benefit from both reduced corporate taxes and personal taxes on dividends, making them an attractive tax-assisted investment, particularly if held outside of registered accounts.