dividend tax credit

ABERDEEN ASIA-PACIFIC INCOME INVESTMENT $7.10 (Toronto symbol: FAP) (CWA Rating: Income) is a closed-end fund that invests mainly in Australian debt instruments. It also invests in U.S. dollar denominated bonds of Asian countries and in Asian bonds. Right now it has 26.2% of its assets in Asian currency bonds. The fund has net assets of $541.7 million. Its units now trade at an 8% discount to net asset value. Aberdeen Asia-Pacific pays a monthly dividend of $0.06 a unit for a high current yield of 10.1%. Note that these dividends do not qualify for the Canadian dividend tax credit. They are not subject to any withholding taxes, however....

MDS INC. $22 (Toronto symbol MDS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 121.9 million; Market cap: $2.7 billion; SI Rating: Average) has repurchased 15.8% of its outstanding common shares at $21.90 each under a Dutch Auction. The buyback cost MDS $499.3 million. To put that in context, the company lost $0.02 U.S. a share (total $2.0 million U.S.) from continuing operations in its most recent fiscal quarter. If you tendered your shares, Revenue Canada will treat $16.75 a share of your proceeds as a deemed dividend. Of that amount, $16.71 is an “eligible dividend”, which means it qualifies for the new enhanced dividend tax credit (45% gross-up). The remaining $0.04 qualifies for the old credit (25% gross-up). The buyback has helped spur MDS’s stock in recent weeks. But it will probably make little progress until MDS absorbs its recent acquisition of California-based Molecular Devices Corp., which makes devices and software that speed up drug research....

ABERDEEN ASIA-PACIFIC INCOME INVESTMENT $8.95 (Toronto symbol: FAP) (CWA Rating: Income) is a closed-end fund that invests mainly in Australian debt instruments. It also invests in U.S. dollar denominated bonds of Asian countries and in Asian bonds. The fund has net assets of $419.6 million. Its units now trade at a 2% discount to net asset value. Aberdeen Asia-Pacific pays a monthly dividend of $0.06 a unit for a high current yield of 8.1%. Note that these dividends do not qualify for the Canadian dividend tax credit. They are not subject to any withholding taxes, however. Higher yields almost always mean higher risk. With Aberdeen, that’s because there is a currency risk from investing in Australian and U.S. bonds. As well, it can invest up to 35% of its portfolio in Asian bonds. Right now it has 20.3% of its assets in Asian currency bonds....

A question investors often ask at this time of year is “What role should bonds play in my RRSP?” If you’re going to hold bonds, an RRSP is a good place for them. That’s because bond interest lacks any tax advantages, unlike dividends from Canadian companies, which carry the dividend tax credit. Bonds usually have fixed maturity dates as well, so you can’t defer capital gains indefinitely, as you can with stocks. But the bigger question is this: should you hold any bonds at all? Holding a mix of bonds and stocks will reduce the volatility of your portfolio over long periods. But it will also cut the long-term return on your portfolio, especially with bond yields as low as they are today....

Starting in 2011, Ottawa will impose a tax on income trust distributions that will put the income trusts on an equal tax footing with conventional taxable corporations. Trusts will pay a 31.5% tax on distributions to unit holders, so your cash flow from those trusts will fall by the same amount. However, if you hold trusts outside of registered plans such as RRSPs and RRIFs, you will not see a large change in your after-tax position — even though the distributions you receive will likely drop by 31.5%. That’s because the distributions will now be taxed as dividends and Canadians will benefit from the lower tax rates provided by the combination of the dividend tax credit and the dividend gross-up (foreigners don’t quality for the favourable dividend treatment). For example, in Ontario, investors in the top tax bracket now end up with about $536 after tax on each $1,000 of trust income. Under the new tax proposals, investors holding trusts outside of RRSPs will end up with about $532 after tax. The difference is roughly similar for the other provinces....

Bonds provide investors with steady income, and preservation of capital. While there’s not as much room for interest rates to fall, higher rates could lead to major losses on fixed-income investments. In our opinion, most income-seeking investors are better off in high-quality, well-managed utility stocks, such as these four. In taxable accounts, these stocks provide roughly as much income as most long-term bonds, after the dividend tax credit. They also give investors the possibility of a capital gain....

ABERDEEN ASIA-PACIFIC INCOME INVESTMENT $7.98 (Toronto symbol: FAP) (CWA Rating: Income) is a closed-end fund that invests mainly in Australian debt instruments. It also invests in U.S. dollar denominated bonds of Asian countries and in Asian bonds. The fund has net assets of $559.2 million. The fund units now trade at a 6% discount to net asset value. Aberdeen Asia-Pacific pays a monthly dividend of $0.06 a unit for a high current yield of 9.0%. Note that these dividends do not qualify for the Canadian dividend tax credit. They are not subject to any withholding taxes, however. Higher yields almost always mean higher risk. With Aberdeen, that’s because there is a currency risk from investing in Australian and U.S. bonds. As well, it can invest up to 35% of its portfolio in Asian bonds. Right now it has 25.2% of its assets in Asian currency bonds....

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 Conservative minority government of Stephen Harper plans to make tax changes that will affect Canadians for the better. During the election campaign, the Conservatives proposed the elimination of the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months. This includes assets such as family cottages, as well as stocks. Our view is that the capital-gains proposal is a great idea, but it needs a lot of work. Otherwise, tax-shelter promoters will figure out ways to convert risk-free interest income into tax-deferred capital gains....