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Why high-net-worth investors should avoid living on dividends alone

Dividends from Canadian (although not foreign) companies are taxed at a favourable rate relative to interest on bonds. Because of the mechanics of the dividend gross-up and tax credit, if an Ontario taxpayer has no taxable income other than their Canadian dividends, they can receive up to about $50,000 in dividends without paying tax.

For top marginal tax rate investors, however, the analysis is more complicated.

Let’s assume that you, a top marginal rate taxpayer, are about to retire. You have calculated that, in addition to a generous pension from your former employer, you will need, for living expenses in the first year of retirement, about $80,000 – and this amount will increase with inflation each year. Thanks in part to a recent inheritance, you have $5-million of capital that you wish to invest in a portfolio of Canadian stocks.

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