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Discussion Starter #1
I'm a drip investor and happily my dividends are taxed at a very low rate. However I'm in stocks and might want to try out Canadian dividend etfs. Do etf dividends get the same low taxation rate as stock dividends? I would pick only Canadian dividends.
 

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Yes... for the dividend portion of the distribution. However, ETFs are trust structures and could also distribute Return of Capital and/or have capital re-invested distributions. Canadian dividend ETFs may also contain REITs and other trusts in their holdings, so there could also be some 'Other income' in the distribution when sorted out for tax purposes on the T3 tax slip.

Example: For XDV, looking at 2019 Tax Diistribution XDV had eligible dividends and some ROC in 2019. CDZ had even more types of income in its 2019 distribution, including Other Income, Foreign Income and some non-eligible dividend income. These can change each year depending on the holdings in the ETFs for that particular year.
 

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Well, if you enjoy a certain tax rate on dividends, then it matters not if they come from a Canadian stock or a Canadian ETF. But the problem is that ETFs distribute a lot more than just dividends as a single stock would.

For example if you go to the BlackRock Tax Information Centre and mouse down to 2019 Distribution Characteristics you'll see all the various tax distributions that will be associated with any particular ETF such as Eligible Dividends, Non Eligible Dividends, Other Income, Return of Capital, Foreign Income, and of course phantom re-invested capital gains.

The taxes are somewhat more onerous with ETF's than single dividend stocks.

ltr
 

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Although there is some diversity to the types of income in the distribution, I think the effect is fairly minimal on taxes. Looking at CDZ, for example, out of 1.13 distributed, 1.08 (over 95%) was eligible dividend. The "complexity" is mostly in the number of different boxes populated in the T-slips with small values that you still have to transcribe into Studio Tax or whatever.
 

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The difference is that an ETF sometimes contains more than just eligible dividend paying stocks, e.g. a REIT or something else.

Further, even in the case of an ETF with only eligible dividend paying stocks in it, an index ETF follows the index to which it is committed.....so when an index drops a stock or adds a stock, there will be capital gains/ROC implications...just as if you had bought and sold those stocks yourself. As Gardner said, the effects of 'other types of income' are relatively minor most of the time and should not detract from the simplicity of owning an ETF. Too many people have angst over ETF tax distributions. They are the best way for most retail investors to invest...to protect them from themselves.
 

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Discussion Starter #6
Thanks, I'll consider that now when I go over to etfs. It would be quite easy to just invest in some etfs and not worry so much about particular companies.
 

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If you choose an ETF full of Canadian stocks, e.g. XIC, there are big tax advantages to be had. The taxman treats eligible dividends more kindly.
 
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