Tax on Dividends VS Cap Gains

[powerofthreemovement]

So help me understand. Person A has 5 million in stock and at age 60 decides to stop the drip and live on 200 k in div income. Person B same amount invested decides to also live on 200 k and sells this amount of stock.
My friend says person A will be taxed more harshly? Any insight on this would be helpful as I thought the dividend tax credit made dividend income more attractive than cap gains.

 

[adryan]

@powerofthreemovement Only 50% of the capital gains are taxed. More info: https://www.hrblock.ca/blog/6-things-to-know-about-capital-gains/

Edit: so dollar for dollar, if you received $100 dividends, that will be grossed up to 1.16x or 1.38x, which means the income to be taxed is $116 or $138 which is actually more than the cash you received but get dividend tax credit. On the other hand, if you incurred a $100 capital gain, you will be taxed on the $50 of that.

 

[caldwelobert]

@powerofthreemovement One thing I just understood recently is that the relative treatment of dividends and capital gains changes drastically with your income. Below ~49K tax on dividends is essentially non-existent while tax on capital gains is around 12%. As your income goes up the tax on dividends increases faster than the tax on capital gains, and they cross over around 100K of income.

At 200K income the tax on capital gains would be ~24% while tax on dividends is around 32%, so person A will be taxed more harshly in your example. On the other hand at 50K income person B would be taxed more than person A.

All numbers above are for Ontario, but I don't think the basic relationship between dividends and capital gains changes that much from one province to the next.

https://www.taxtips.ca/taxrates/on.htm

 

[powerofthreemovement]

@caldwelobert Thanks so much for this detailed reply