Do you know that there are two methods you’ll be able to legally pay no taxes on dividends?

The primary one — holding your dividend shares in a Tax-Free Financial savings Account (TFSA) — is one you seemingly already find out about.

There’s one other one, although, that you simply in all probability have by no means heard of. On this article, I’ll discover the 2 methods that you could pay no taxes on dividends, beginning with the TFSA technique after which shifting on to the second, lesser-known technique.

The TFSA technique

The TFSA technique for paying no taxes on dividends is straightforward. Simply maintain your dividend shares in a TFSA. For those who don’t have a TFSA, simply go to your financial institution and speak about opening one. As soon as they open up the account for you, merely deposit some funds in it. Then, buy no matter shares you want and have researched completely. For those who had been 18 or older in 2009, you’d have $95,000 price of TFSA contribution room instantly. Make investments $95,000 at a 5% portfolio yield, and also you’ll get $4,750 in annual money again — completely tax free!

Holding dividend shares in a TFSA can positively prevent cash if dividend shares are all you’re holding. Nevertheless, for those who’re going to be holding bonds together with dividend shares, bonds ought to take priority for being included within the account. The reason being that curiosity is taxed way more steeply than dividends are. You pay your full marginal tax charge (the tax charge in your highest bracket) on curiosity. You get to offset a tax credit score towards your dividends. As a result of dividends are considerably taxed-advantaged by default, it is smart to prioritize placing bonds and Assured Funding Certificates (GICs) in your TFSA.

The dividend tax credit score technique

Subsequent up, we’ve got the dividend tax credit score technique. This can be a nice technique to make use of in case your TFSA is already maxed out or for those who would like to place bonds in your TFSA.

The way in which this works is fairly easy.

First, decide a inventory that has eligible dividends. “Eligible” means it needs to be a dividend paid by a Canadian company. Fortis (TSX:FTS) is an effective instance of a inventory that pays an eligible dividend. This inventory has a 4.42% dividend yield, that means that it generates lots of money revenue with comparatively little invested. So, it pays to say the dividend tax credit score on a inventory like Fortis.

Second, it’s essential to calculate your dividend tax credit score. That is fairly easy. In case you have $95,000 invested in Fortis, your pre-tax dividends come to $4,200 per 12 months. You gross that quantity up by multiplying it by 1.38, which will get you to $5,796. Then, you multiply $5,796 by 15% to get a $869 tax credit score. Subsequent, subtract that quantity from the taxes you’d have owed in your Fortis dividends, the place the tax credit score is just not an element. In case your marginal tax charge is 17%, you’d have owed $850 in pre-credit dividends. However because of the $869 credit score, you find yourself getting a $19 refund again!

In fact, your marginal tax charge must be fairly low for this to work. However it doesn’t matter what, the dividend tax credit score saves you cash, so be certain to place bonds in your TFSA first and, solely after that, put dividend shares in it.