Dividend Investing in Canada: How to Earn Tax-Efficient Passive Income

Dividend investing is a popular strategy among Canadians looking to build passive income. It can be a powerful way to grow wealth, especially when focusing on tax efficiency.

Here’s what you need to know to get started.

What Is Dividend Investing?

Dividend investing involves buying shares of companies that regularly pay out a portion of their profits to shareholders. These payments, called dividends, can provide a steady income stream without the need to sell any shares.

The Benefits of Dividend Investing

There are a number of benefits to incorporating dividends into your investment strategy. Here are a few:

Reliable Income

Dividends provide a consistent cash flow that can supplement employment income or fund retirement.

Favourable Tax Treatment

Due to the dividend tax credit, eligible Canadian dividends are taxed at a lower rate.¹

Long-Term Growth

Many dividend-paying companies are stable, mature businesses with strong fundamentals.

Compounding Returns

Reinvesting dividends allows investors to buy more shares, thus boosting the power of compounding returns over time.

Lower Volatility

Dividend-paying stocks may experience less price volatility compared to growth stocks, thereby ensuring less disruption during market fluctuations.

Inflation Hedge

Companies that consistently grow their dividends can help preserve your purchasing power over the long term.

Tax Efficiency Tips for Dividend Investing

To make the most of dividend investing in Canada, it is important to consider how different accounts impact your tax liability.

Use Tax-Free Savings Accounts (TFSAs)

Dividends earned in a TFSA are entirely tax-free. You won’t pay tax on income or capital gains, and withdrawals are not taxed.²

Consider Registered Retirement Savings Plans (RRSPs)

Dividends earned in an RRSP are not taxed when received, but you will pay tax when you withdraw funds in retirement.³ Still, RRSPs are an excellent way to defer taxes until you are likely in a lower tax bracket.

Be Strategic in Non-Registered Accounts

If you invest in dividend stocks in a regular taxable account, focus on Canadian companies that pay eligible dividends. These qualify for the dividend tax credit, reducing your effective tax rate compared to your interest income.

What Are Eligible Dividends?

Eligible dividends are paid by Canadian public corporations from income taxed at the general corporate rate.⁴ These dividends qualify for the federal and provincial dividend tax credit, making them more tax-efficient than other types of investment income.

Dividend investing can offer Canadians a steady, growing source of passive income with significant tax advantages. To make the most of your investments, use tax-advantaged accounts, focus on quality companies, and understand how tax rules apply.

LET'S TALK

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Ivy Pierson, CEP, MBA Investment Advisor Representative Securities and advisory services offered through Cetera Advisors LLC (doing insurance business in CA as CFGA Insurance Agency LLC), member FINRA/SIPC, a broker/dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity. Pierson Wealth Management is located at 28368 Constellation Rd., Ste. 396, Santa Clarita, CA 91355. CA Insurance Lic#0C92500. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful