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Early Retirement on Non-Eligible Dividend Income (Small Business)

A couple weeks ago, I wrote about the tax implications of living off eligible dividend income (ie. dividends paid by Canadian publicly traded companies). The conclusion was that it’s very tax efficient to live off dividends providing that you don’t have any other income. I also determined that, counting for weather and dividend taxation, Ontario and British Columbia are highly attractive places to live.

Right after posting that article, I had a number of readers email me about the tax implications of non-eligible dividend income. Non-eligible income is basically dividends distributed from private companies to shareholders. Typically speaking, non-eligible dividends face higher taxation, but how high? There are lots of private business owners out there. What if a business owner sold their business and wants to live off the proceeds as their retirement?

Lets look at varying non-eligible 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. Note that I’m assuming 2016 tax rates and that non-eligible dividends are our only income source.  For the sake of comparison, I kept the eligible dividend taxes payable in brackets.

 Province $60,000  $80,000  $100,000  $120,000  $140,000
 NL $1,172 ($1,148) $4,048 ($3,108) $8,348 ($5,068) $12,649 ($10,764)  $17,136 ($16,367)
 NS $2,902 ($0)  $6,497 ($1,598) $11,511 ($3,620) $16,905 ($9,432)  $22,322 ($15,122)
 PE $3,475 ($0)  $6,907 ($0) $11,757 ($776) $16,969 ($6,141)  $22,497 ($11,325)
 NB $2,098 ($0)  $4,992 ($0) $9,859 ($0) $14,726 ($3,644) $19,624 ($7,113)
 QE $3,443 ($1,793)  $6,853 ($2,910) $11,833 ($5,146)  $17,009 ($9,713)  $22,189 ($15,599)
 ON $563 ($1,050) $1,816 ($1,200) $5,725 ($1,200) $9,199 ($4,700)  $13,292 ($7,977)
 SK $1,963 ($0)  $4,782 ($0) $9,401 ($0) $14,020 ($3,511)  $18,639 ($6,922)
 MB $5,186 ($751) $8,891 ($2,062) $14,015 ($3,559) $19,437 ($9,664)  $25,649 ($15,670)
 AB $1,154 ($0) $3,684 ($0) $7,634 ($0) $11,583 ($3,225) $15,533 ($6,513)
 BC $803 ($0) $2,778 ($0) $6,337 ($0) $9,896 ($3,200) $13,763 ($6,477)
 NT -$1,202 (-$1,359) -$578 (-$1,668) $1,517(-$1,884) $3,702 ($1,532) $6,420 ($4,902)
 NU -$1,404 (-$1,656) -$745 (-$2,208) $2,081 (-$2,400) $5,316 ($1,016)  $8,610 ($4,386)
 YT $820 ($0) $2,577 ($0) $6,284 ($0) $9,990 ($3,372)  $13,696 ($6,723)

It appears that taxation of non-eligible dividends from a small business is all over the map.  Literally.  Surprisingly, it appears that non-eligible dividends are fairly efficient in NL (when compared to eligible dividends), but very high in MB.  BC and ON remain competitive when it comes to overall dividend taxation.

This table comes in handy for those of you with holding corporations with stock investment holdings.  Using tables like this will help you decide whether to pay out distributions by flowing through eligible dividends to shareholders, or to simply pay out a non-eligible dividend.

For business owners out there, the more you dividend out of your company in any given year, the more tax the shareholder will pay.  For example, in NL, distributing $60k in dividends to a married couple would result in 2% income tax for that year (assuming no other income). However, distributing $140k will result in 12.2% tax for the year. If tax optimization is what you are after, less dividends spread out over many years is more efficient than large lump sums (low and slow).

My current financial freedom goal is $60k in dividend income in about 5 years.  Although the ideal tax situation would be to live off eligible dividends only, it’s inevitable that we will have other sources of income as well.  Our business non-eligible dividends may come into the picture, and perhaps some contract work.  While posts like this are a good starting point for your research, tax optimization is different for every family and you really should contact a good tax pro for sound advice for your situation.

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  1. BRS on January 29, 2016 at 12:32 pm

    Just finished reading the book. Recently started my TFSA trading account with CIBC. Just wanted to let you know I am really motivated to follow your tips. Thank you.
    Think, starting late is better than never starting at all.

    • FrugalTrader on January 29, 2016 at 1:47 pm

      What book would that be? :)

      • BRS on January 30, 2016 at 7:57 pm

        The “Millionaire Teacher”.

  2. HighonDividends on January 30, 2016 at 4:18 am

    There is a mistake in your article.
    You said: “Non-eligible income is basically dividends distributed from private companies to shareholders.”

    Could be, but not exclusively. Non-eligible dividend income comes from any source the government considers ‘non-eligible’ including PUBLIC companies. Some domestic dividend paying public companies, as well as most foreign public companies fall into that. It is complicated, but is dependent from what activities and world regions that dividend is derived from.

    Let’s be clear….

    • FrugalTrader on January 31, 2016 at 1:01 pm

      Good points, this was meant in a small business context (CCPC). Thanks.

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