Looking for a steady source of income not reduced by taxes? After tax income, is what eventually matters to all of us. I will show you how to earn up to $50K Tax Free in Canada. All you need to do is planning. Depending on your province, it’s possible for an individual with no other sources of income to earn around $50,000 in dividends without paying any tax at all. This amount varies by province due to the make up of the Dividend Tax Credits (Federal and Provincial portions). The article Canadian Dividends No Tax provides a detailed listing of the maximum amount for each province.
Two items in the Canadian Tax law facilitate this option.
- The dividend tax credit. A non-refundable tax credit. Given to Canadian investors receiving dividends from preferred or common shares of Canadian corporations.
- The basic personal amount. Another Universal non-refundable tax credit Canadian residents can claim on their tax return to reduce the amount of taxes paid to the government.
Depending on your situation, additional tax credits may available. Here is list of them with the CRA
At income level up to the “Basic personal amount”, both credits are working to reduce the tax burden. At income level above the “Basic personal amount”, only the the dividend tax credit is applied.
How to Earn up to $50K Tax Free in Canada
Here is a sample 2019 Tax Return as prepared in turbo tax 2019. I have kept the return to a bare minimum. The following assumptions are made for this return:
- Single Person
- Residing in Ontario
- All the income is from “eligible dividends“. The amount of dividends is $51,819.74.
- No other income is included.
The sample T5 used is shown below. The amount of dividends is $51,819.74 and the tax credit is $10,740.84.
| 24 – Actual Amount of dividends | $ 51,819.74 |
| 25 – Taxable Amount of eligible dividends | $ 71,511.22 |
| 26 – Dividend Tax Credit for eligible dividends | $ 10,740.84 |
The Tax Return Summary sample
| Detailed tax summary | |
| Year | 2019 |
| Total income | |
| Net employment earnings | 0 |
| Pension income | 0 |
| UCCB and EI benefits | 0 |
| Dividends, interest, and investment | 71,512.22 |
| Registered disability savings plan | 0 |
| Rental income | 0 |
| Taxable capital gains | 0 |
| Taxable support payments received | 0 |
| RRSP income | 0 |
| Other income | 0 |
| Net self-employment income | 0 |
| Social assistance income | 0 |
| Total income: | 71,512.22 |
| Deductions | |
| RPP, RRSP, PRPP, or pension splitting | 0 |
| Union or professional dues and UCCB repayment | 0 |
| Child and disability supports deductions | 0 |
| Moving expenses | 0 |
| Carrying charges, support, and other | 0 |
| Deduction for CPP/QPP/PPIP (self-empl.) | 0 |
| Employment expenses | 0 |
| Social benefits repayment | 0 |
| Net income: | 71,512.22 |
| Other deductions | 0 |
| Losses of other years | 0 |
| Capital gains deduction | 0 |
| Northern residents/additional ded. | 0 |
| Taxable income: | 71,512.22 |
| Federal non-refundable tax credits | |
| Personal amounts (taxpayer and spouse) | 12,069.00 |
| CPP/QPP and EI | 0 |
| Other amounts | 0 |
| Allowable medical expenses | 0 |
| Amounts multiplied by 15%: | 1,810.35 |
| Charitable donation credit | 0 |
| Total federal non-refundable credits: | 1,810.35 |
| Refund or balance owing | |
| Basic federal tax | 0 |
| Minimum tax | 0 |
| Less: Federal credits | 0 |
| Add: Tax on RESP income and WITB advance payments | 0 |
| CPP, EI, and Social benefits repayment | 0 |
| Provincial tax payable (excluding Québec) | 600 |
| Total payable: | 600 |
| Refundable tax credits | |
| Tax deducted | 0 |
| CPP/QPP and EI overpayments | 0 |
| Climate action incentive | 224 |
| Other credits | 0 |
| Employee & partner GST/HST rebate | 0 |
| Instalments | 0 |
| Provincial tax credits | 0 |
| Total refundable tax credits: | 224 |
| Federal balance due: | 376 |
Conclusion
As you can see from the above sample tax return, its possible to earn $ 51,819.74 almost tax free. The return shows taxes owed of $376 which is due to the OHIP premium in Ontario. Similar measures taken by other provinces may also reduce this benefit slightly.
The favorable taxation of dividends is a powerful reason, to ensure you hold Canadian dividend paying stocks in your own portfolio. Canadian peferred shares offer yields average 6.46% (June 24 2020). Depending on the type and quality of the preferred the yield will vary. Use our Rank and Compare views of the various preferred grouping to find the ones suitable to your needs.
See our article on how to withdraw from your RRSP tax free. This is also possible due to the same two non-refundable tax credits.
In this post we provided information and tax planing strategies regarding Canadian Tax Law. Please review our Disclaimer and About Us page for the proper context of the information provided here and across all pages and posts in our website.