In Canada, the taxation rates for dividend and interest income are different due to the preferential tax treatment given to dividends in the form of a “dividend tax credit”.
Interest Income: Interest income is fully taxable and is taxed at your marginal tax rate based on where you live in Canada. For example, if an individual receives $1,000 in interest income, they are taxed on the entire amount2. In the top tax bracket, you’d pay roughly $530 in taxes on $1,000 in interest income3.
Dividend Income: Dividends from stocks are taxed at a lower rate, making them a more tax-efficient investment option. Dividend income is eligible for a dividend tax credit in Canada. For instance, you would pay $390 on $1,000 in dividend income in the top tax bracket.
The difference in taxation rates between dividend and interest income is designed to encourage investment and economic growth. However, the best strategy for an individual will depend on their specific financial situation and goals. It’s always recommended to consult with a financial coach for personalized advice.
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