Taxation of Dividends from Trusts

Or would it simply be:

Multiply your grossed up amount by your marginal tax rate

distribution of $1 * marginal tax rate = w

Calculate Federal Tax Credit and Provincial Tax Credit

* $1450 * 18.966% (Federal rate) = x
* $1450 * 6.65% (NL) = y
* Total tax payable on $1000 worth of dividends: w - x - y = z

That seems a little simpler....I am under the impression that these calculations are supposed to be very complex and difficult to figure out if help outside of a registered account/

Any help out there? We can use the AET.UN example to keep it simple (97% income/interest, 3% ROC)

Rookie ... the first thing you need to understand is that income trusts do not pay dividends ... they issue distributions ... there is a difference ... occasionally, there is a tiny amount of dividend included in a distribution, but the key word there is “tiny” ... in most cases, distributions are composed of some combination of income, capital gain, and return of capital ... each of those components is taxed differently.

The ROC portion you seem to have down ... the examples you posted are correct ... of course, if you didn’t sell 1 year later, then those amounts wouldn’t become taxable until some time in the future when you actually do sell.

The capital gain portion of the distribution is taxed exactly the same as any other realized capital gain ... half the gain is added to your income, and that half is taxed as ordinary income ... a capital gain distribution has no effect on your adjusted cost base ... there is no capital gain distribution in the example you are citing.

The income portion of the distribution is NOT taxed at your marginal rate ... it is taxed as ordinary income ... there is a difference ... there could actually be several sub-categories of income distribution that are all treated the same, taxwise ... domestic business income, domestic royalty income, interest income, foreign non-business income, foreign business income, etc., are all taxed the same way ... as ordinary income.

Sometimes, if there was any foreign income, there may also be a foreign tax withheld from the trust ... in that case, the foreign tax withholdings would also show up on your T-slip, and those can be entered as credits on your tax return.

Cdn dividends are in a whole separate category, tax-wise, but you generally won’t have to worry about that with income trusts, since so few of them distribute any dividends at all, and when they do, it is usually just a tiny, tiny fraction of the total ... there are no dividends in the example you are citing.

So in your example, the 97% that is income would simply be taxed as ordinary income. That's all there is to it.

Yes. Thats why I am rookie.

Thanks for the help. I think that I have it.


Purchase AET.UN income trust for $10, it distributes and annual income/interest of 97c, + 3c ROC, for a total distribution of $1. Sell 1 year later for $20. Then the capital gain is:$20 - (10 - .03) = $10.97

And the 97c is added to my earned income, and is taxed accordingly.


If I don't sell, but simply buy and hold, do I get taxed on the accrued 97c earned income annually?

I was considering DRIPing this stock to accumulate more shares, and come retirement time, when I have a lower earned income, would stop the DRIP and utilize the $ distribution as income.