Early this year I opened my Tax Free Saving Account (TFSA) and put in my maximum contribution of $5000. Unlike some people, I actually had a very specific plan when I opened mine up. I own a few income trusts that produce distributions for me, which are taxed at my marginal rate. So I sold most of them to move them over into my TFSA to save the tax in the long run. There’s just one problem with the plan.
One of my picks APF.UN is changing over to a corporation. So it’s entirely likely I will now end up having dividends being paid in my TFSA which is something I wasn’t trying to do. You see my long term plan is to have a small pool of dividend paying stocks in a taxable account to generate cash. They are taxed at an attractive rate of a mere 7.3% in SK(see here to find your rate), so in my mind I’m trying to save my RRSP and TFSA contribution room for those investments with a higher tax rate like bonds or GICs.
Yet when would it be better to shelter the gains in an RRSP or TFSA? Well that depends. It depends which province you live in and how much money you make now and how much you plan to in the future.
My wife, for example, runs a daycare and doesn’t make much money. As such in her case the tax credits she receives from her dividend actually exceed the value of the dividend. So in effect her tax rate is negative for dividends. So if she put her dividend paying stock in a RRSP or TFSA she would actually be losing money.
Yet for me, if I had $5000 to invest in a stock at 5% yield should I put in my TFSA or a taxable account? Well at 5% I would get $250/year in dividends which would be taxed at $18.25. So in a TFSA I would save that $18.25. If I was only using my TFSA as a high interest account at 1% I would only be saving tax at 35% on $50 or a total of $17.50. So in reality I would save more money by putting the stock in the TFSA.
Yet numbers are the only reason to invest. Other factors include your investment knowledge and comfort with picking your own stocks, what you plan to use the dividends for (ie: if you are using them now to add some income or planning on using the money in retirement). The reality is there is no one right answer for everyone, but rather a right answer for you personally. Do the math and see the results and then do what is right for you.
To get a free analysis of APF.UN, use Trend Analysis:
Tim is the blogger behind the blog, Free at 45. He dreams of retiring before his 45 birthday and live in Regina, SK.
image source: Dustin Diaz
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