After my last financial freedom update, a few readers have asked me about dividend taxation. This article will show the advantage of dividend income for the early retiree. This post was originally written in 2016, but updated for 2018.
Every year when winter strikes in Newfoundland, my wife and I always ask the same question “what would it be like to live somewhere else?”. While my wife and kids dream of enjoying a warm beach in Florida, my mind, on the other hand, wanders to jurisdictions with lower taxes and a lower cost of living.
It’s unlikely that we’ll change provinces while the kids are in grade school, but it’s possible once they reach post-secondary education. Thinking ahead 10-11 years from now, both kids will be underway in their post-secondary pursuits, and our dividend portfolios should be a substantial size and more than enough to support our lifestyle (unless I get that Ferrari ;)).
When we do decide to call it quits from regular salaried work, our tax picture will change substantially. Not only will our income tax change from salaried income to investment income, but our taxes owed will also vary depending on which province we live in.
Dividend Taxes by Province
Let’s look at varying dividend income scenarios. Assuming that my wife and I split the income, what would our taxes look like in different provinces?
Using an online tax calculator, I ran some numbers and this is what I came up with for taxes owing. Note that I’m assuming 2018 tax rates, no additional deductions besides the basic personal amount, and eligible dividends are our only income source.
Running these numbers came with a number of surprises, namely the low taxation of dividends in the territories and New Brunswick, and also that Newfoundland charges so much more for dividend income on bigger non-registered portfolios. I also find it quite impressive that a couple can make up to $100k in dividend income and pay $0 in taxes in highly populated provinces like BC and Alberta.
Dividend taxes start to pick up when approaching $120k in dividend income (between two people). However, to put things in context, $120k dividend income would require a $3.4M portfolio invested mostly in dividend stocks (assuming 3.5% yield).
For aspiring investors looking at super early retirement (30’s and 40’s), their expenses are usually very low in the $30k-$45k/year range with dividend portfolio sizes in the range of $800k to $1.2M. Living in any province with $30-$45k taxable dividend income would result in very little tax payable – if any at all!
As previously mentioned, looking forward 10 years or so, I imagine that our financial picture will be different than today. We recently hit $43k in dividend income, which is steadily approaching our $60k goal in a couple years. Once that goal is reached, it’s possible that in 10 years, our dividend income could approach $100k. At that level, considering weather, lifestyle, and family, it looks like Ontario and BC are attractive options.
In the grand scheme of things, there are very few early retirees in their 30’s and 40’s and even fewer who retire on solely dividend income. It is much more likely that there will be multiple sources of income with different taxation levels. I imagine that people who achieve financial freedom at a young age continue to grow and work on projects – at least I know it will be for me.
Having said that, it’s still fun to imagine kicking up your shoes, doing what you want, and paying very little tax.