What does the new dividend tax regime mean for you?
With the implementation of the changes to the taxation of dividend income announced in the2006 federal budget, it's a good time to revisit the taxation of all investment income, including interest, dividends and capital gains. In comparing the different tax rates on these sources of investment income, clearly, not all investment income is equal on an after-tax basis. Even tax-conscious investors may not appreciate how the recent changes to the taxation of eligible dividends may impact their after-tax returns.

In the past, capital gains have been taxed at lower rates than other types of investment income such as interest and dividends. In 2006, when the federal government reduced its tax rate on "eligible" dividends, the preferential tax treatment of capital gains versus dividends substantially narrowed. (Eligible dividends include taxable dividends that are received by a Canadian resident individual paid after 2005 by public Canadian corporations and designated as an eligible dividend.)

In Ontario, the tax differential between dividends and capital gains has been greatly reduced. The Combined Top Marginal Tax Rates - 2007 table shows the expected top marginal tax rates for investment income. Clearly, dividends and capital gains enjoy a substantial tax advantage over interest and regular income.