At AFT Trivest, we ensure that principles of tax-smart investing are applied in our portfolio management, wherever relevant. That landscape has changed quite significantly in the past few months, as a result of actions by both the Federal and BC governments. You have probably been following the year-and-a-half saga with respect to income trusts. The Liberals in 2005 took a shot at “fixing” the tax structural problem and the Conservatives have now taken their run at it this Fall. The BC government finally responded in October 2006 to the Liberal gambit the year before.

The thrust has been to bridge the gap between the taxation of trust and Canadian dividend income, which, in the past, has favoured trusts quite substantially. The aggregate approach of the three governments has been to move each into the middle towards each other. Two of the moves lowered the tax on dividends and the most recent move raised the tax on trusts. Also, the unfair and inequitable tax treatment of dividends and capital gains has been addressed. The result of all of this is an interesting new world for investors.

The following chart shows how different kinds of income will be taxed in BC, starting in 2006:

You will see that there is virtually no dividend taxation at income levels up to $67,511 and trivial taxes up to $72,756. The bottom row shows what the tax rates were before these legislative changes. The drop in dividend taxes is significant across all income levels. This accentuates the value of tax smart investing strategies, which may include, depending on your own circumstances, the following:

  • Structuring your sheltered accounts to carry the allocation of your fixed income whilst over-loading your equities in non-sheltered accounts
  • Low income taxpayers with high dividend income may find that they are “overblessed” under the new deal: their tax credits may exceed their tax payable! This is sub-optimal. It may be appropriate to “find” more income to soak up the excess tax credits, or utilize the option to transfer the dividend income to a higher income spouse