There’s an immediate gratification aspect to dividend investing – cash is paid to you every three months. In a time of volatility in financial markets, this benefit is not to be underplayed.
But there’s a deferred benefit to dividends as well – you pay less in taxes on dividends held in a nonregistered account than you do on regular income, including bond interest. The dividend tax credit provides this benefit broadly, but the net impact depends on what province you live in.
Alberta, British Columbia and Saskatchewan stand out as welcoming to dividend investors. With taxable income of $100,000, the marginal tax rate on eligible dividends – paid by corporations – would be just 7.96 in British Columbia, 9.63 per cent in Saskatchewan and 10.16 per cent in Alberta. New Brunswick stands out as well at 11.04 per cent.
Manitoba, Quebec and Newfoundland were at the high end, with marginal tax rates on eligible dividends between 20.53 and 23.29 per cent. Ontario came in at 17.79 per cent, a middling performance that worsens for high earners. With a taxable income of $250,000 the marginal tax rate on eligible dividends in Ontario would be 39.34 per cent.
Only Quebec, Nova Scotia and Newfoundland are higher at that level. Saskatchewan was lowest at 29.64 per cent, followed by Alberta at 32.93 per cent and New Brunswick at 33.51 per cent.
Ontario looks much better for dividend investors with a taxable income of $50,000 – a marginal tax rate on dividends of zero. The same applies in B.C., while New Brunswick’s rate is 1.13 per cent, and Saskatchewan and Alberta come in at 2.07 per cent and 2.60 per cent, respectively.
At higher incomes, capital gains are taxed more favourably in nonregistered accounts in some provinces. But at $50,000 in taxable income, you’re better off with dividend income across the country.
Three other favourable spots in the country for dividend investors: Northwest Territories, Yukon and Nunavut. All three are on the low end of marginal tax rates on eligible dividends at modest, medium and high income levels.
Overall, though, the west is best for dividend investing in a nonregistered account. New Brunswick looks good, too.