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What do we mean when we say: “Not all investments are designed equal. Some are more equal than other folks.”
By this we mean to say that the government does not treat all investments equally. The government supplies favourable tax treatment options to certain income streams and none at all to others.
Dividends are one particular asset class that the government favours. By providing a favourable tax remedy on dividend revenue, the government motivates investors to invest in companies and corporations and thereby assists the economy to develop.

In Canada, investors receive something that is named a Dividend Tax Credit that is applied to dividends earned from Canadian stocks. Typically it minimizes the amount of tax owed to the government by half.
For instance, let’s say a high paying lawyer earns revenue from dividends in the quantity of $10,000. Had the lawyer earned this $ten,000 from his company, most most likely he would have had to spend at least $four,000 in taxes. But since he earned the income from dividends, the government makes the distinction and instills a tax credit. In effect, the tax credit minimizes the tax burden by almost $2,000.
In contrast, let’s say that the exact same high paying lawyer invests in a bond and earns $ten,000 in interest earnings. In this situation, the government treats the interest revenue exactly as if the lawyer had earned it from his practice. There is no mechanism in location to aid the investor reduce his tax burden.
It is exciting to note the difference in tax therapy between dividends and interest income.
Many of you might be questioning why the government tends to make the distinction at all. Following all, whether an investor buys stock or tends to make a loan, each strategies are delivering a crucial service to our enterprise neighborhood– access to capital. So why make the distinction?
The primary reason for the favourable tax remedy on dividends is due to something called ‘double taxation’. Generally, the government recognizes that taxes on dividend income is paid twice – the moment by the corporation that concerns the dividend (keep in mind: dividends are paid from following tax income) and yet another time, by the person investor who receives the dividend. In essence, the government acknowledges the inequity related with double taxation and provides a tax credit to make it more equitable.
This is not the situation with interest earnings. Whereas dividends are paid out with soon after-tax income to the corporation, interest is paid out with ahead of-tax revenue. For example, a organization that generates operating earnings (that is revenues much less price of goods sold) of $100,000 would usually have to spend tax on $100,000 assuming no other bills. But if that very same business now has interest payments of $20,000, the firm would only have to spend tax on reported earnings of $80,000. Hence, in the eyes of the government, it is out-of-pocket this tax quantity. And for that reason, government feels less of a need to have to minimize the tax burden on the person investor who receives the interest paid out by the corporation.
Understanding the taxation difference amongst dividend and interest revenue is the very first step in making confident your portfolio is tax efficient in which Tax Efficiency indicates minimizing the quantity of taxes that we owe in a way that is legal and in accordance inside of the confines of Income Canada.
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