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Topic: Daily Advice

Behind the Headlines May, 2006

With their first budget, the Conservatives are increasing the federal dividend tax credit on Canadian dividend income. If fully matched by the provinces, this will lower taxes on dividends by about five percentage points for top income earners. That means you’ll pay less tax on dividend income than on capital gains.

However, that would make it more advantageous for investors to seek less risky dividends in place of risker capital gains. Just as dividends are taxed at a lower rate than lower-risk interest income, it stands to reason that in a future budget, the Conservatives will introduce measures to lower taxes on capital gains.

This could take the form of deferring the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months, as proposed in the election campaign.

The budget also removes the capital gains tax on listed stocks donated to charity. This change makes it even more cost-effective to give stocks to a charity, rather than sell the stocks and then give cash.

Investors holding shares of Canadian companies will also benefit indirectly from changes in corporate tax rates. This will raise profits at those companies, and that should push their stock prices higher.

The changes include general corporate income tax rate reductions, and the elimination of the corporate surtax for all corporations.

The budget’s tax cuts are a small move in the right direction, but should improve the outlook for the Canadian economy and stock markets.

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