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Fredericton Daily Gleaner ~ Capital Appreciation ~ Dividend Tax Credit ~ December 4, 2006 - 06 Jan 2007 by TaxHelp
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The new Liberal government and our friends in the Department of Finance here in Fredericton delivered an early Christmas present to investors late last week. And while it’s been a long time coming, it turns out to have been well worth the wait.
But first some recent history. Buried in the December 10, 2002 provincial budget was an announced change to the dividend tax credit, effective January 1, 2003. The government reduced this credit from 7.6 per cent to 3.7 per cent. I remember commenting at the time how this would go with little protest, at least for the next year or longer, since most people wouldn’t notice until the spring of 2004 when they file their tax returns.
A dividend is the profit a corporation makes that is released to their shareholder. The problem is that the corporation (which is owned by the shareholder) has already paid tax on that dividend. So the challenge is to find a way not to tax the same money twice. The dividend tax credit mechanism was instituted as a way to avoid the double taxation that an investor faces when he or she receives the profit directly. The mechanism works this way: the dividend is increased by 25 per cent and reported on the tax return. The federal government then generates a tax credit of 13.3 per cent. The province prior to 2003 had a credit of 7.6 per cent.
In real numbers, in 2002, a single taxpayer earning $40,000 in dividends only, reported $50,000 on their return and then paid $1,210 in taxes to Ottawa and $1,242 to Fredericton. The following year, with the reduction in the provincial tax credit, the same person paid $3,154 to Fredericton – more than two and a half times the previous year’s tax bill! So while the government was able to proclaim that it wasn’t a tax increase, it sure felt that way to some.
Why the history lesson? Last November, then federal Finance Minister Ralph Goodale announced changes to the way this mechanism was going to work in face of the popularity and tax advantages of income trusts. He stated that the gross-up amount for large corporation dividends like you would receive if you owned bank shares was increasing from 25 per cent to 45 per cent and the enhanced tax credit was going from 13.3 per cent to almost 19 per cent. In his May budget, current Finance Minister Jim Flaherty confirmed this.
Regular readers to this column might remember that on October 2 of this year I wrote “What rate is Fredericton going to set for the enhanced dividend tax credit in light of these changes? Some people would suggest that it should return to the same relative rate as before. Depending on who is doing the calculating, that could be anywhere from 10.5 per cent to 12 per cent. We will just have to wait and see how the new government handles this challenge.”
Now we know. The province has again assumed a leadership role and announced on Thursday that the provincial dividend tax credit is going to be 12 per cent. And how does it compare to our neighbours? The closest rate is PEI at 10.5 per cent. Nova Scotia is less than 9 per cent and Newfoundland is less than 7 per cent. And that single New Brunswick taxpayer with $40,000 of these enhanced dividends as income now reports $58,000 on his or her tax return. And the combined federal and provincial tax bill according to the latest version of the tax software? Zip – that’s right – nada, zero, nothing!
On a separate note it's that time of year again when we offer a service to various garden clubs, lunch-and-learn employee sessions, business meetings and association functions where we discuss the newest tax changes. These events usually run somewhere around an hour once a question-and-answer is completed and are offered both during the day and evening. Most important, there is no charge for this service. If you or someone you know has responsibility for meeting planning at your work or social club, and would like us to come out and have a chat early in the new year, please contact the office to arrange a time and give us some details so we can tailor it to your specific organization.
And I promise, if nothing as amazing develops in the next seven days, next week we’ll look at strategies to adopt in order to lower your taxable income.
Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1 (888) 450-1212. His column appears Mondays. |
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