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In a recent column you talked about being able to earn $52,000 in dividend income in certain provinces without paying tax. However, you failed to mention that the dividend gross-up creates phantom income that could trigger (or increase) the clawback of Old Age Security benefits for seniors, which makes dividends less attractive. Why didn’t you mention this?

Because it’s not as big a deal as some people believe.

I’ve written about the dividend gross-up and OAS clawback before. My conclusion then, based on calculations provided by a tax expert, was that, even for an investor in the OAS “clawback zone," earning dividend income is still more tax-friendly than earning interest income.

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But since a few readers raised the OAS clawback issue again, today we’ll take another look at it.

For 2019, the OAS clawback – formally known as the OAS pension recovery tax – kicks in when net income reaches $77,580. For every dollar of income above that threshold, 15 cents of OAS benefits are clawed back. When income reaches $125,937, no OAS is payable.

In my column about earning tax-free dividend income, the OAS clawback wasn’t even a factor. If you’re a senior in Ontario, for example, and collect $52,000 in actual dividends, the 38-per-cent gross-up would increase your taxable income to $71,760 – still less than the clawback threshold. And, thanks to the dividend tax credit, you would pay no tax (apart from an Ontario health premium of $600). This assumes you have no other sources of income.

Granted, most people don’t live on dividend income alone. What about a more typical situation, where a senior has income from OAS, the Canada Pension Plan and a company pension, in addition to dividend or interest income?

Dorothy Kelt of TaxTips.ca crunched the numbers and found that dividends still provide a clear tax advantage over interest, even after taking the OAS clawback into account. She compared two seniors, both with 2019 non-investment income totalling $39,653 – $7,253 from OAS, $8,400 from CPP and $24,000 of eligible pension income. One senior also earned $30,000 in eligible dividends, whereas the other collected $30,000 in interest from fixed-income investments.

Result: The dividend gross-up would push the first senior’s income several thousand dollars past the OAS clawback threshold, resulting in an OAS recovery tax of $521. The second senior would have no OAS clawback. But the first senior would still have a significantly lower tax hit over all (including the OAS clawback) than the second senior because of the dividend tax credit.

In Ms. Kelt’s comparison, the dividend investor’s tax savings relative to the fixed-income investor ranged from about $3,500 to more than $7,000, depending on the province or territory. Her calculations also took into account a clawback of the age credit available to people 65 and over. Ms. Kelt ran a second comparison with $50,000 of investment income from either dividends or interest, and the tax savings for the dividend investor were even larger.

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“Normally, dividends are still the best way to go, even with the OAS and age credit clawbacks,” Ms. Kelt told me.

Remember, too, that with interest rates at depressed levels, the yields on fixed-income securities pale next to the yields available on many dividend stocks. Many five-year guaranteed investment certificates, for example, pay about 2.5 per cent, but you can easily find bank stocks, pipelines, power producers or telecoms yielding 5 per cent or more. Yes, there are risks with dividend stocks – prices can decline and dividend cuts can happen – but you can manage the risks by buying only high-quality companies.

I’m not suggesting that people should avoid bonds and GICs, which have their place in a well-balanced portfolio. What I’m saying is that arguments against dividend stocks based on the OAS clawback don’t stand up to the facts.

In your recent article about apartment real estate investment trusts, the yields averaged about 2.4 per cent, which is peanuts. Why would you recommend stocks that pay such tiny yields?

It’s true that apartment REITs typically have lower yields than other types of REITs, many of which yield 5 per cent or more. But in exchange for accepting a smaller yield, investors are expecting more share-price growth from apartment REITs as these companies use their internally generated funds to acquire buildings and renovate suites, which in turn allows them to charge higher rents.

The REITs featured in the column – Canadian Apartment Properties REIT (CAR.UN), InterRent REIT (IIP.UN), Killam Apartment REIT (KMP.UN) and Minto Apartment REIT (MI.UN) – have all posted very strong share price gains, so investors have been quite happy to accept their lower yields.

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There is at least one apartment REIT, Northview Apartment REIT (NVU.UN), that pays a higher yield of about 5.6 per cent. But Northview has been hurt by the resource-related downturn in Western Canada and by weak results in Northern Canada. Also, Northview’s payout ratio is high, at about 95 per cent of adjusted funds from operations (a real estate cash flow measure) based on 2019 estimates. That helps to explain why Northview hasn’t raised its distribution since 2015, whereas many other apartment REITs have been hiking their distributions annually.

E-mail your questions to jheinzl@globeandmail.com.

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