Last updated: Jan-18-2019

1/19/2019 3:46:50 PM
Show Printable Version Download Plain Text
Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.

By Gordon Pape  | Monday, July 24, 2017

Q – I’m an IBM retiree and bought shares through IBM’s payroll deduction plan, reinvested the dividends, and inherited some. The dividends are quite nice, but they are taxed as ordinary income in Canada, and there is U.S. withholding tax of 15%. I have a large capital gain that makes selling the shares not particularly attractive. But I wonder if that wouldn’t be the wisest thing to do?

IBM pays a reasonable dividend, and I think it is fairly secure. If I sold, after paying the capital gains, I’d have a lot less to invest. To get the same total income, I’d have to probably take more risk, but if I invested in Canadian equities because of the better tax treatment, I would probably be further ahead after taxes.

Some very rough numbers. If I had $100,000 in IBM shares and got US$3,500 in dividends after the withholding tax, I might end up with US$3,000 or C$4,000. If I sold, after paying the capital gains tax, I might have US$75,000 to invest, or C$100,000. Because of the lower tax rate on Canadian dividends, maybe I’d only need $3,500 in dividends to net $3,000 after tax. So if IBM was paying a dividend of 3.5%, to net the same after taxes from Canadian dividends I might only need a Canadian equity paying 3.4%. Not quite as risky as I first thought, in fact less. As I said, all very rough numbers, but you get the idea. How do I easily determine the actual numbers? – Robert F.

A – Well, let’s break this down. Let’s assume you own 590 shares of IBM, which is worth about US$100,000 at the price at the time of writing. The stock pays an annual dividend of $5.60 so your shares are generating US$3,304 annually. That’s a yield of 3.3%.

Withholding tax takes 15%, leaving you with US$2,808.40, or C$3,741.55. Now let’s assume your annual income is $75,000. The EY online personal tax calculator shows that if you are a resident of Ontario, you’ll pay tax at a rate of 31.48% on those dividends, leaving you with C$2,563.71.

Suppose you sell the IBM shares as you suggest. We don’t know what your cost base is, but let’s assume the stock has doubled in value. You have a capital gain of US$50,000, or C$66,613.50. Only half is taxable, so your actual tax rate on that amount is 15.74%. You are left with C$56,128.54. Add that to your untaxed profit of C$66,613.50, and you have a total of C$122,724,03 to invest.

That would buy you a little over 2,000 shares of, say, BCE at the current price. Those shares pay a dividend of C$2.87 per year, so you would receive income of $5,739.20 annually. Your tax rate would be 8.92% on eligible dividends, leaving you with $5,227.26 in your pocket.

As you can see, using those numbers and a $75,000 income, you are much better off with BCE from an income perspective. However, the figure will change, depending on your income level and province of residence. A Quebec resident with $150,000 in income will pay tax on eligible Canadian dividends of 35.22% and a capital gains rate of 24.99%.

Consult a financial planner to work on your personal numbers. – Gordon Pape

If you have a money related question send it to me at . Write “Fund Library Question” in the subject line. I can’t guarantee a personal response, but I’ll include the most interesting ones in this column.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investornewsletter, which are available through the Building Wealth website.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at and on Facebook at

Notes and Disclaimer

© 2017 by The Fund Library. All rights reserved.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.


Find a Stock

(Leave blank for all)
Symbol   Name
Forgot your password?
Register now
Tech Support
For general inquiries, please email the Librarian.
Home |  Features |  Member Services |  Tools |  Funds |  About Us
For any questions or problems with this site, please contact the Librarian.
Page ID: 20:80:1047:00016300:9/12/2017:3:10:55 PM Duration of this visit: 0 sec.