Taxes 101

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Hello,

Do you have any advice on how to approach Tax Season in regards to dividend income?
I hold dividend stocks in a TFSA, RDSP, and will soon be holding dividend stocks in a regular trading account through my bank.
I’m very new to the tax penalties on Dividends and want to know as much as I can when it comes time to do my taxes.
I’m currently 100% invested in Canadian dividend stocks because it’s my understanding that the Canadian tax laws favour Canadian dividends over U.S. or international Dividends. Is this true?

What advice do you have based on your own experience on how to handle dividends and taxes?

I’ve been a member since your cyber Monday sale and I’ve enjoyed it so far. You’re very informative.
Many Thanks!

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Asked on December 14, 2020 3:42 pm
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Dividend from US or International stock are considered interest income and 100% fully taxable in Canada. Your T3 or T5 will show this, you will just enter them in the proper case in your filing except if your T3 or T5 in show in USD, then you have to put the exchange rate on the date of the payment of the dividend. If multiple payment in a year for a stock, stocks or fund, you can use the yearly average provided by CRA. For Capital gain, you need to know your exchange rate on the date of purchase and selling to properly calculate your capital gain. I never saw a T5008 from broker showing it but normaly, if you are not using a discount broker, you can request from your adviser a report that should give you your cost and selling total in Canadian. This is valid if you trade with a USD or foreign denomination account.
This is the biggest mistake I see from peoples doing their own income taxes. CRA is making more and more revision on this. On our PRO tax software, we enter all these info and if they ask for proff we can send them the working sheet. And dont forget to produce your T1135 if you own mre than $100,000 CDN of foreigh asset including stock and fund at broker or bank.

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Posted by Dan Kent
Answered on December 14, 2020 8:52 pm
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Hey there.

Interesting about the RDSP. In terms of the tax implications of the RDSP, I'm not an expert by any means. This is a rare account on my end, as I've only known maybe a few people who have them. An accountant is going to provide you WAY more accurate and knowledgeable information than I would in that department.

On the taxes however, you'll pay no tax on dividends in your TFSA on Canadian stocks. You WILL pay them on U.S. dividends (IRS Withholding tax) if you decide to own them later on inside that account. This is why U.S. dividend stocks are best kept in an RRSP, where the IRS deems it a retirement account and waives foreign dividend tax. Withholding tax will be applied once you open up that taxable account too.

If you were to hold Canadian stocks that pay dividends inside of a non-registered (taxable) account, because dividends are paid with after tax income by a corporation, the government provides a dividend tax credit to investors that essentially makes it as if the dividend was taxed on the corporations pre-tax income. This is a process that depends on the governments level of "gross up" and your overall income level.

Overall, we're not tax experts here and we urge everyone who asks to seek out proper tax advice. We can guide, but we definitely aren't the know-alls of taxes, especially with unique accounts.

But one thing I can say, is don't let tax situations hold you back from owning international equities. In my opinion, having exposure to the U.S. and worldwide markets is key to a well diversified portfolio.

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Posted by Dan Kent
Answered on December 14, 2020 4:44 pm