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Negative Tax Rate

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Personal Tax -> Dividend tax credits -> Negative marginal tax rate

Why is there sometimes a negative marginal tax rate for eligible dividends for lower income tax brackets?

This is because the enhanced dividend tax credit rate is higher than the lowest income tax rate in some cases.  This means someone in the lowest tax brackets (after combining Federal + provincial tax brackets and rates) can reduce their other taxes payable by receiving dividends eligible for the enhanced dividend tax credit.

Enhanced dividend tax credit using combined
Federal/Ontario tax rates for 2012

Tax Bracket 1
up to $39,020

Combined federal + Ontario tax rate

20.05%

 
Dividends eligible for enhanced dividend tax credit

$100.00

Gross-up 38.00
Taxable dividend $138.00
 
Federal + Ontario tax at 20.05%

$27.67

Less dividend tax credits:
Federal 15.02% x $138 $20.73  
Ontario 6.4% x $138 8.83  
Total dividend tax credits   $29.56
Tax payable on dividends -$1.89
 
Marginal tax rate (tax payable as % of actual dividends) -1.89%

The negative tax amount is not refundable - it can only be used to offset other taxes payable.

In Ontario there will only be a negative tax rate in the lowest tax bracket when the addition of the dividends don't increase the Ontario Health Premium, and don't reduce or eliminate the Ontario tax reduction.  The tax reduction is available for taxable income less than $18,000 in 2012 for a single person.

In order to not be affected by the Ontario Health Premium, the dividends would have to keep the taxable income within the same health premium "bracket".  With a taxable income of $25,000 or greater before dividends, up to $11,000 of grossed-up eligible dividends could be added without increasing the $300 health premium.  This is equivalent to $7,971 of actual dividends.  The taxes otherwise payable would be reduced by $150.67 (1.89% x $7,971).

The only provinces where there is no negative marginal tax rate in the lowest tax bracket are Manitoba and Québec.  However, the negative rate is very low in some provinces:  AB and SK 0.03%, NS 0.11% and PE 0.99%.

The negative dividend tax credit is best in BC:

Enhanced dividend tax credit using combined
Federal/BC tax rates for 2012

Tax Bracket 1
up to $37,014

Combined federal + BC tax rate

20.06%

 
Dividends eligible for enhanced dividend tax credit

$100.00

Gross-up 38.00
Taxable dividend $138.00
 
Federal + BC tax at 20.06%

$27.68

Less dividend tax credits:
Federal 15.02% x $138 $20.73  
BC 10% x $138 13.80  
Total dividend tax credits   $34.53
Tax payable on dividends -$6.85
 
Marginal tax rate (tax payable as % of actual dividends) -6.85%

As with any province, the negative tax amount can only be used to offset other taxes payable.

For BC, the above rate is only achieved when the outcome is not affected by the low income tax reduction and the MSP premiums.  For a single person, there is a low income tax reduction when taxable income is under $30,507 in 2012.  Full MSP premiums are paid when adjusted net income (single person or couple) is over $30,000.

A BC single person with taxable income of $30,001 before dividends could earn up to $7,013 of grossed-up dividends ($5,082 of actual dividends) without getting into the next higher tax bracket.  This would reduce taxes otherwise payable by $331.57, or 6.5%, without changing the MSP premiums.  The savings is less than 6.85% because the low income tax reduction is affected.

The negative tax rate for BC's second tax bracket, up to $42,707, is -3.2%.

See the tables of marginal tax rates for your province/territory to find your own marginal tax rate for dividends.

Tax Tip:  Dividends from Canadian public companies may reduce your taxes payable.

 

Revised: June 22, 2013

 

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