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Discussion Starter #1
Ok - i have a few questions :)

1) I want to hold dividend yielding stocks and I will be investing 6,000 per year into them. Where should I hold these? Would it be 3k in a TFSA and the other 3k in a plain old non-registered account? Could I put some of this under my wifes name and hold 3k in my TFSA and 3k in her TFSA?

2) And with taxes - you pay tax on the dividends you received for that year, even if i re-invest them as DRIP? Right?

3) From looking at the taxation in Alberta of dividend paying stocks - it looks to me that i pay around 3% tax on the income from dividends. does that sound about right? Assuming my marginal tax rate is around 25% and i get less than 35k dividends per year. I followed the MDJ article on dividend round up.

If it is the case - they seem far sexier for retirement than perhaps a 30% tax rate on all money i draw out of a potential rrsp!

Many thanks guys + girls.
 

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Hold them in a taxable account so you can benefit from their favourable tax treatment. Once you are over 65, move them into a tax-free account to avoid various clawbacks that kick in at 32k taxable.

Get RRIFmetic or get a financial planner that uses it.
 

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Tax FREE beats tax favorable if you ask me. TFSAs don't cause clawbacks, RRSP's do

If you put them in an RRSP, they will be taxed without the favorable treatment on withdrawal (but it grows tax free until then)

There may be other considerations such a the RRSP HBP


Main point don't put them in non-registered just because they're tax favorable, unless you're maxing you TFSA and your wife's with non-tax-favorable holdings
 

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Discussion Starter #4
kcowan - can you explain what you mean by holding in a taxable account for the favourable tax treatment please?

Also - whats a clawback?

mode3sour - can you explain your bit of
Main point don't put them in non-registered just because they're tax favorable, unless you're maxing you TFSA and your wife's with non-tax-favorable holdings
I'm pretty confused by the answers :)
 

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Ok - i have a few questions :)

3) From looking at the taxation in Alberta of dividend paying stocks - it looks to me that i pay around 3% tax on the income from dividends. does that sound about right? Assuming my marginal tax rate is around 25% and i get less than 35k dividends per year. I followed the MDJ article on dividend round up.
I thought it was a straight across the board 10% on (Canadian companies of course) dividends? (and no I'm not thinking of the provincial Alberta rate of 10%). Maybe I misunderstood something or didn't read it clearly... can anyone confirm please?
 

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mode3sour - can you explain your bit of
I meant you shouldn't hold dividend payers in a taxable acct just because they are taxed less. No tax is still better than some tax

IE put them in your TFSA unless you have non-dividend payers to put there instead
 

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If you have unused TFSA room, going with the TFSA. It's also not clear-cut whether it's better to put dividend payers in RRSP or in an unregistered account. You benefit from lower tax rates on dividends and capital gains outside the RRSP (when they are eventually withdrawn it's fully taxable), whereas dividends can compound tax-free in an RRSP. I'd say it's not at all obvious. But TFSA is superior to unregistered for Canadian eligible dividend payers.
 

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#2 Yes you pay tax on reinvested dividends.

check out www.dripinvesting.org for more info on the drips


The first question I have is...is the $6000 your total amount of $ available for investing annually or is that just what you are allocating for dividend equities. Do you also plan on investing other money into equities that do not pay a dividend? And do you plan on buying any equities from foreign exchanges?

B/c that information could make a difference in where you decide to allocate funds.

ie: a foreign purchase of KO should definitely be dripped in your RRSP to avoid witholding taxes.
 

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RRSP vs TFSA is a whole other discussion

TFSA is better for the flexibility and since you never pay a cent of tax on the yield. It has no negative affect on OAS/CPP

RRSP is better if you will be in a lower tax bracket in retirement. Sure you will have less money but for all you know taxes could be much higher in 30 years. If you max your RRSP you may get clawbacks on OAS/CPP

They are likely pretty close in the end even though they're entirely different animals. It's probably wise to do a mix of the 2.
 

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Maximum marginal tax rate on dividends in Alberta is 15.88% in 2010 (up from (14.56% in 2009). These rates are 8-10% points better than Ontario! Maximum tax rate on regular income is 7.41% points lower in Alberta than Ontario. PST (sorry I mean HST) is 8% points lower in Alberta. Life is good.
 

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kcowan - can you explain what you mean by holding in a taxable account for the favourable tax treatment please?

Also - whats a clawback?
I think you got several answers on the tax treatment.

On clawbacks, it is what the government does to several tax credits based on your total income. With dividends this amount is grossed up and the grossed up amounts contribute to the clawback.

There are clawbacks at every income level but they only affect older people. And they result in more tax being paid on dividend-bearing holdings when compared to straight interest.
 

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A slight refinement to kcowan's description of a "clawback:" I think this is best understood of the "clawing back" of a benefit otherwise available from the federal or provincial government.

Both tax credits and income can be clawed back. kcowan described clawing back a tax credit - but an income benefit (such as OAS) can be clawed back, too. In the case of an OAS clawback, what happens is you (automatically) receive less than the maximum based on your previous year's tax return. So if the full benefit is (let's say) $5000 and you receive (let's say) $4,000; this is typically described as a $1000 clawback.
 

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Discussion Starter #18
OK - so I've summarized the pros and cons of dividend paying stocks in different saving vehicles - correct me if im wrong - im still learning :p

RRSP
==========

+ Builds Tax Free
+ Paid with before tax dollars
- You have to starting taking from the principal
- You will pay your marginal tax rate at withdrawal

TFSA
============
+ Builds Tax Free
- Paid with after tax dollars
+ You don't have to take it out at any point
+ You pay a much smaller percentage tax

Non-Registered
============
- Builds but you get taxed
- Paid with after tax dollars
+ You don't have to take it out at any point
+/- You pay a much smaller tax compared to RRSP, but more than TFSA

So looking at it - TFSA seems the best to me. Because:

+ I can have it grow there till im 130 years old
+ I can transfer it to my wife or kids when i die
+ I get tax credit on it and pay a maximum of 12% tax on it as opposed to the marginal rate of 36%.
+ Assuming i pick the right dividend stocks - my payments will increase forever when i retire. I will be poorest the day i retire and get richer.
 

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You may want to build a very simple model which forces you to put numbers to your assumptions. For example, you say that you will pay "much less" tax when you are retired than you do now. Care to put numbers to that?

I'd suggest building an Excel spreadsheet which has you depositing the same amount in a TFSA, RRSP and non-registered account and running it out until (say) age 65. Compare where you are with each option, and make sure to account for tax refunds and dividends.

Off the top of my head, I can think of a few ways in which your assumptions will be broken (or at least your assumptions will only hold if some very specific circumstances hold).

At any rate, I would start there. You don't solve financial questions with words; you resolve them with numbers.
 

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Discussion Starter #20
Yea I've actually created one here for dividend paying stocks. I have worked in tax too - to see what tax id have to pay in a non-registered account.

The first page lists what i think i might have to pay per month when im retired.
The second is some calculations as to how much money in future value i should need to achieve this.
The third page shows what each year might look like assuming the variables on page 4.

https://spreadsheets0.google.com/ccc?key=tLbcUs1xysOlERzXMzlOFjQ&hl=en#gid=1
 
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