Early Retirement (FIRE) on Dividend Income – Dividend Taxes in Canada

Ever wonder what it would be like to live off passive income? Spending your day doing whatever you want and working on passion projects because of interest rather than putting bread on the table.  What about doing this well before you turn 65? What about financial freedom in your 40’s or even 30’s?

I’m here to tell you that it’s all possible!

For newer readers out there, after reaching the million dollar net worth milestone in 2014, I put more focus on building my dividend portfolio with the goal of achieving financial independence.

While there are a number of ways to generate passive income, I chose dividends from the public stock market because I’m comfortable with picking equities, the risk involved and holding through economic cycles for the long term.

In addition, high-quality dividend payers are fairly predictable in their payments and usually a long history of annual dividend increases.  Here are some ideas for top Canadian dividend stocks.

After hitting my dividend income freedom “number”, I’ve started to think more seriously about early retirement scenarios.  Not just how we will live, but potentially where.  We currently live in Newfoundland, but would another province make more sense from a financial (and weather) perspective?

Let’s take a look at income taxes owed by dividend income and province in the table below. The lower taxes (compared to salary only) are due to the dividend tax credit (Canada).  Thanks to taxtips.ca for being my Canada dividend tax calculator.

Without further delay, let’s look at dividend tax rates in Canada 2020 (by province):


As you may or may not know, if you have no other income besides dividend income, you would pay very little income tax (up to a particular point).  This is mostly due to the dividend tax credit as mentioned above.

Income Tax by Province and Dividend Income

Province$40,000$50,000$60,000$70,000$80,000$100,000$120,000
BC$0$0$1,358$3,148$4,651$7,641$10,511
AB $0$0$1,371$3,172$4,676$7,665$10,529
SK $0$0$1,523$3,454$4,959$6,451$11,357
MB$908$1,564$4,238$7,465$10,267$15,846$21,232
ON$600$600$2,176$4,251$5,756$9,257$14,324
QB$812$1,957$4,024$6,821$9,906$16,488$23,097
NB$0$0$1,595$3,585$5,091$8,073$10,830
NS$695$1,778$4,489$7,592$10,291$15,661$21,349
PE$0$163$4,489$5,469$7,830$12,524$16,989
NL$1,997$3,253$6,204$9,638$12,579$18,470$24,506

Income Tax % by Province and Dividend Income

Province$40,000$50,000$60,000$70,000$80,000$100,000$120,000
BC0.00% 0.00%2.26% 4.50% 5.81% 7.64% 8.76%
AB0.00% 0.00%2.29% 4.53% 5.85% 7.67% 8.77%
SK0.00% 0.00%2.54%4.93% 6.20% 6.45% 9.46%
MB2.27% 3.13%7.06% 10.66% 12.83% 15.85% 17.69%
ON1.50% 1.20%3.63% 6.07% 7.20% 9.26% 11.94%
QB2.03%3.91% 6.71% 9.74% 12.38% 16.49% 19.25%
NB0.00%0.00% 2.66% 5.12% 6.36% 8.07% 9.03%
NS1.74%3.56% 7.48% 10.85% 12.86% 15.66% 17.79%
PE0.00%0.33% 7.48% 7.81% 9.79% 12.52% 14.16%
NL4.99%6.51% 10.34% 13.77% 15.72% 18.47% 20.42%

What is the dividend tax credit?  Since dividends are paid out from corporations after paying corporate taxes, to make things fair, investors who receive taxable dividend income, like in a non-registered account, will receive a dividend tax credit.

Without getting too much into the weeds on the calculation of the dividend tax credit, eligible dividends received will be grossed up by 38%.  Then 15% of that number will be your dividend tax credit.  So $100 in dividend income will be grossed up to $138 for calculation purposes, which means $20.70 will be received as a tax credit.

As you can see from the table above, you can see that $50,000 in dividend income is the sweet spot for taxation purposes.  In the top three populated provinces in Canada, making $50,000 in dividend income would result in paying:

  • Dividend tax rate Ontario: 1.2%
  • Dividend tax rate Quebec: 3.91%
  • Dividend tax rate British Columbia: 0%

Overall, an early retiree on dividend income would pay less tax on the west side of Canada, and the most tax in the east coast of Canada.  Unfortunately, for me, I live in NL!  From a financial, social and weather perspective, Ontario and BC are looking pretty darn good right now!

If $50,000 to live tax-free isn’t enough for you, take note that the numbers in the table above are per investor.  So if you have a large dividend portfolio, you and your spouse could generate a $100,000 household income and potentially pay $0 in income tax (depending on the province that you live in).

So if you are married, and early retirement on dividend income is a goal for you, spreading the taxable dividends across the both of you may be a tax strategy worth discussing with your accountant.

From a more realistic perspective, from what I’ve seen, early retirees typically do not rely 100% on eligible dividends to pay their expenses.  There are typically other forms of income such as RRSP withdrawals, part-time employment, business income and perhaps rental income. Adding these forms of taxable income will skew the dividend taxation to be significantly higher.

As there are endless income combinations and resulting taxes, there is no one size fits all.  Best that you head over to your favourite tax calculator and start churning out the numbers.

I just know that for my personal situation, dividends work for me and have paved the way to financial freedom.

Ever wonder what it would be like to live off passive income? Spending your day doing whatever you want and working on passion projects because of interest rather than putting bread on the table.  What about doing this well before you turn 65? What about financial freedom in your 40’s or even 30’s?

After hitting my dividend income freedom “number”, I’ve started to think more seriously about early retirement scenarios.  Not just how we will live, but potentially where.  We currently live in Newfoundland, but would another province make more sense from a financial (and weather) perspective?

I’m here to tell you that it’s all possible!

For newer readers out there, after reaching the million dollar net worth milestone in 2014, I put more focus on building my dividend portfolio with the goal of achieving financial independence.

While there are a number of ways to generate passive income, I chose dividends from the public stock market because I’m comfortable with picking equities, the risk involved and holding through economic cycles for the long term.

In addition, high-quality dividend payers are fairly predictable in their payments and usually a long history of annual dividend increases.  Here are some ideas for top Canadian dividend stocks.

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So if you are married, and early retirement on dividend income is a goal for you, spreading the taxable dividends across the both of you may be a tax strategy worth discussing with your accountant.

From a more realistic perspective, from what I’ve seen, early retirees typically do not rely 100% on eligible dividends to pay their expenses.  There are typically other forms of income such as RRSP withdrawals, part-time employment, business income and perhaps rental income. Adding these forms of taxable income will skew the dividend taxation to be significantly higher.

As there are endless income combinations and resulting taxes, there is no one size fits all.  Best that you head over to your favourite tax calculator and start churning out the numbers.

I just know that for my personal situation, dividends work for me and have paved the way to financial freedom.

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Brad
1 month ago

My wife and I sold our home which was in both our names. Then we transferred the money to a Non-reg cash account in both our names JWROS to be exact. We split all dividend income each year 50/50 and have never had a problem with CRA, so it is good advice as you mentioned if done correctly. Of course we both have our own TFSA’s max out each year as well.

Paul
29 days ago
Reply to  Brad

Great to hear someone is doing it, my wife and I have the money tighted up in multiple real estate that’s making about 10% (principal+cashflow) so basically can’t get the dividends…. but have definitely considered selling it in the next 5-10 years and simply put that into a dividend investment ETF to get distribution monthly from it :)