Interest or dividend?

Many Canadians don't want to risk their retirement portfolios to the uncertainty of the stock market and instead put their money into interest-savings structures like GICs to reduce risk and maintain their capital. Others, especially those who have financial planners to guide them, put their money into dividend-producing guided stock portfolios. So, which is better? Let's compare the two options and you decide.

Dividend income gets preferential tax treatments in the form of a dividend tax credit. Interest income is taxed the same as ordinary income and is therefore taxed at your marginal tax rate based on where you live in Canada. It is necessary to figure out the correct multiplier to calculate the additional amount of interest income you would have to earn, to then equate this after-tax interest income to the amount of after-tax income retained from an eligible dividend. Below is a list of each province, the top marginal tax rates for 2021 and the multiplier.

Alberta: Eligible dividends are taxed at an effective top marginal rate of 34.31 per cent and interest is taxed at the top rate of 48 per cent. Therefore, an Alberta investor would have to earn approximately $1.2633 more in interest income for every $1 of eligible dividend income in the same after-tax position. Investor A: $1,263.27 interest income x 0.48 = $606.37 taxes, leaving $656.90 as income ($1,263.27-$606.37 = $656.90) Investor B: $1,000.00 eligible dividend x 0.3431 = $343.10 taxes, leaving $656.90 as income ($1,000-$343.10 = $656.90)

Investor A has to earn more in their investment to pay more taxes to end up with the same income in 2021.

You know I am going to recommend you chose the dividend income strategy. That being said, I also know a lot of older Canadians are worried about the markets and some have little to no tolerance for market swings. Why not consider talking to your financial planner about a blue-chip dividend portfolio? It doesn't hurt to look at other options to make money wisely. Christine Ibbotson is author of Don't Panic: How to Manage Your Finances and Financial Anxieties During and After the Coronavirus and the bestselling book How To Retire Debt Free & Wealthy. askthemoneylady.ca