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Putting faith in income trust is common trend - Metro US

Putting faith in income trust is common trend

Q: Will I pay less income tax with Canadian dividends or income from an Income Trust? I am a high-income earner.

A: Income trusts have been the darlings of investors in the past several years, particularly with investors that prefer greater cash flows. Investors should look at several factors when comparing the income from an income trust and a Canadian dividend. Only a portion of the income trust funds an investor receives are subject to tax in the year of receipt. Generally, funds received by an investor consist of a return of capital (this amount reduces your cost of the units, but is not taxable) and return on investment (which is the portion that is taxable in the year of receipt). For example, a trust that pays $100 may consist of $30 of return of capital (not subject to tax) and $70 of income that is subject to income tax. On the other hand, an entire Canadian dividend is subject to income tax in the year of receipt. Individuals will pay less income tax on Canadian dividends if the income trust taxable amount was identical to the dividend. Income trusts provide greater cash flows than most dividends, and this is reflected by their popularity.

In efforts to level the playing field between publicly traded corporations and income trusts, Prime Minister Stephen Harper’s conservative government announced new changes to taxable dividends for 2006.

Starting in 2006 “eligible dividends” paid by Canadian publicly traded companies and Canadian Controlled Private Corporations (CCPC) from income taxed at the general corporate rate will be subject to the 45 per cent gross-up (ineligible dividends continue under the old rules). The individual will qualify for a federal dividend tax credit of 19 per cent of the gross-up rate, resulting in a reduction for high-income earners to approximately 15 per cent federal tax rate. Not bad compared to 20 per cent under the old dividend rules and a 29 per cent federal tax rate on employment income.

Individuals and shareholders of CCPCs should consult their tax professional/accountant, as not all dividends are “eligible dividends.”

Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304.

choochonghcga@yahoo.ca

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