First Dividend Payment

by Mr. Cheap

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Woot! As I checked my E*Trade account this morning, I see that I’m up a super-sweet $72.60 as a dividend payment from Rothmans (I feel like I should go buy some smokes for impressionable teenagers with the cash :-) ). I was wondering how it would work, since I hadn’t seen any of the cash (the dividend was supposedly paid on the 15th, I guess it took them a couple of business days to get it into E*Trade).

This certainly cushions the dip that my stocks have taken recently (according to share prices, I’m down $439.01). Factoring in the dividend, that’s a cool -$366.41 (but I’m hoping to make it up in volume ;-).

As I asked previously, I have no idea how it would work from a tax perspective if I withdrew the $72.60 from my account (currently it immediately went to pay down my margin debt). I think I’ll leave it in the account (pay down the debt), just to keep things simple for now…

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{ 15 comments… read them below or add one }

1 Anonymous

I now understand EXACTLY how he felt :-)

2

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.

John D. Rockefeller

3 Anonymous

GIV: Thanks! :-)

If I’m ever tempted to sell, I’m going to force myself to come back, read this post, read the comments, and remember how I’m feeling now ;-)

When I expanded my position with Rothmans litigation-risk has been on my mind a little bit more, but I’m sure there no more vulnerable now then when I first bought them, so I’m sure its just the hobgoblins of my mind trying to trick me into selling…

4

I know what you mean. I remember when I got my first dividend cheque ever. It was only for about $35 bucks, but man, did I love the concept of owning and asset that actually paid me for owning it.

I hope it’s the first of many for you!

5 Anonymous

TMW: So if I follow you, you’re saying I could now withdraw $72.60 from my E*Trade margin account (and take my girlfriend out for a night on the town). At the end of the year, I’ll pay the tax on this dividend payment (I’m totally clear that I have to pay that), and I can view ALL the interest I paid on the margin account as deductible (even though the $72.60 was added then removed)?

I definitely will get an “official answer” to this (maybe I’ll call revenue canada directly and save myself paying an accountant), but I thought I’d try to collect thoughts from anyone who might know first…

I wonder if there’s any way to get E*Trade to send the dividend to a separate account or directly to my checking account (and avoid the entire issue)…

6

Mr. Cheap:

Here’s my amateur Cdn. tax take on your question (please don’t take this as advice and do your own research).

The payment of the dividend is a taxable event regardless of what you do with it afterwards. in other words, your tax position is no different if you left it in your account or not. Rothmans will send you a form of declared dividends paid to you and you have to add this to your tax return (i think its a t2 form but don’t quote me on that).

Thus, you have to reserve some funds at the end of the year for any dividends received since it is not like a pay cheque where they deduct the taxes before an employer pays you. The interest deductible is an cumulative amount at the end of the year. So, if you use your dividend to pay down the principal on the loan your interest payments will be less and you have less interest to deduct. Its an end of year calculation so you calculate the aggregate amount of interest you paid. If you do not reserve money to pay for the taxes on dividend declaration then your tax liability is the taxes owing minus deductible interest.

If you take your dividends and pay down non-deductible expenses, your tax liability is still the taxes owing on your dividends. If you have reserved money for taxes on dividend in a separate bank account, you are using de facto after tax money and you can do with it what you want. If you use the entire dividend for non-deductible expenses, your tax liability is the taxes due on the dividend payments.

Your issue isn’t really “mingling”; its whether you can pay the tax on the dividend declaration. I hope that helps (as clear as any discussion on tax is!).

7 Anonymous

Thicken: I’m asking if it *IS* used to pay down the loan, but I don’t really want to do that, and if I immediately move it out of the account. If you withdraw an equivalent amount, is that the same as not paying down the loan, or is it too late to “unring the bell” once its deposited in the account?

Thanks for your thoughts!

8

You are describing a book-keeping issue here:

1. Dividend payment is added to your account- this is a taxable event, taxed under the appropriate dividend rate. You have to pay this tax whether or not its in you keep in your account or not.

2. If the dividend payment is not posted/used to pay down your investment loan then your interest deductibility amount has not changed. If the dividend payment is used to pay down the investment loan then you still have point 1 to consider and you adjust your interest deductibility accordingly. In your example, you take your dividends out immediately, so it is not used to pay down your loan.

If you want to keep it simple, move all your dividend payments to a separate account so your interest payments are easy to record.

Again, better confirm with an accountant but you can sort this out through some clean book-keeping practices.

9 Anonymous

I agree with you, I’m just not certain if Revenue Canada would agree with both of us :-).

10

If the dividend payment is automatically repaying debt then your interest deduction would be smaller. If you took out an equivalent amount of money, you are de facto keeping the interest deduction the same assuming the money was taken out very quickly afterwards. If you do it the same day, you are in the exact same position with respect to the amount of the interest deduction as if the dividend was never paid (however, and we both agree, you still have a tax obligation on the dividend payment). I hope that helps.

11 john

All dividends are taxable at you marginal tax rate

You will owe about 25% back as taxes if you are at a high marginal tax rate.

If you have no income at all then you can make almost 40K in dividends per year before you pay anything.

That is why if you are married and your wife is not working invest her savings while spending from your earnings. Her marginal tax rate will be zero.

All your margin interest payments are deductible from your investment earnings

E trade will forward the paper work to you at the end of the year that will show all your taxable dividends.

Make sure not t forge the interest paid in 2006 summary from e Trade as that is what you will deduct.

If you want to have a fast growing portfolio, never ever take anything out. Only add.

If you owe taxes pay them from somewhere else (i.e. you bank account, a bonus etc)

Make your investment account “input only” and in a few years you will have serious money there.

12 Mr. Cheap

Hi John,

Thanks for all the info! The one other thing is that I get the dividend credit, which will lower the taxes I’m paying (since the dividends are from a Canadian corporation). If you don’t live in Canada, basically dividends from Canadian companies give us a preferred tax rate (which is a bit of a formula to determine, but works out being around half).

13 john

You are 100% right

An easy way to see it is after all of the gross ups etc. Just look at what you will owe revenue Canada after all of the formulas etc.

Compare the following.

I am at the highest marginal tax rate.

The following rates applied for Canadian companies.

When I make $1 in interest I end up paying $0.46 of it in taxes in April

When I make $1 in dividends I pay $0.31 back in taxes in April.

When I make $1 in capital gains I pay back $0.23 in taxes in April

My wife is at a lower tax rate. I would guess her rate is similar to yours

For $1 in interest she pays $0.36 in tax

For $1 in dividends she pays $0.22 in tax

For $1 in capital gains she pays $0.17 in tax

Dividends from US companies are treated the same as Interest above.

All this assumes this is outside your RRSP.

14 Dividendgrowth

I see that even in Canada tobacco companies pay good dividends :-)

15 Sam

Thanks for the clarity John. Anyone can feel free and jump in on this one, your comments are certainly appreciated.

For simplicity sake, can you confirm my understanding of this sequence.

Let’s assume this is the ONLY transaction that happens in the current tax year.

I receive $1 in dividends. I have a loan outstanding that requires a $1 interest payment. I take the $1 I receive in dividends and pay off my interest payment.

Do I owe anything to any governmental agency for this year?

Again, assume that I have no other income.

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