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.

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.

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).

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.

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.

Thanks for your thoughts!