Investing

Dividend vs Capital Gain

  • Last Updated:
  • May 12th, 2021 2:59 pm
[OP]
Newbie
Oct 10, 2020
5 posts

Dividend vs Capital Gain

Hi all

I have purchase a high yield NYSE listed American Depositary Receipts (ADR) with (Hong kong stock exchange underlying) with my non-registered account with TDDI. The ex-dividend date is looming and I am wondering what's the best move for me.
Based on my research, hongkong charge 0% withhold tax.
example (NYSE:ACH, HK:2600)

Assuming the purchase price is $100, dividend is $5 the price before ex-div date is $105
Based on efficient market hypothesis, the price after ex-div date is $100, right?

So I have 2 options
1.I can keep the stock, and will receive $5 as dividend
2.I can sell the stock before ex-div date @$105, and then repurchase it back after ex-div date @$100, this will result me having a $5 as capital gain.

I would like to know which route is better from tax planning point of view. I am in Ontario

Many thanks in advance
Last edited by EricC7138 on May 10th, 2021 4:55 pm, edited 1 time in total.
9 replies
Newbie
Apr 20, 2002
36 posts
18 upvotes
If you keep buying and selling it may be considered on account of income rather than a capital gain. that sounds more annoying than withholding tax.

You may be able to claim a foreign tax credit for the withholding tax anyways
[OP]
Newbie
Oct 10, 2020
5 posts
The stock is actually listed in Hongkong, and there is 0% withholding tax, as least from what I read. (and there won't be foreign tax credit since there is nothing to offset.)

I brought in Jan and haven't made any other trade. (besides Norbert's gambit to convent CAD to USD). It's very unlikely to be consider active trading.
Newbie
Apr 20, 2002
36 posts
18 upvotes
If there is no withholding tax and assuming the stock price will drop by the exact amount of the dividend then this site gives you the rates assuming you’re living in Ontario.

It’s been many years since university days but I’m not sure if the stock prices by exactly the amount of the dividend vs dividends less tax and some other factors.

I think the market is much less efficient than what theory suggests.


https://www.taxtips.ca/taxrates/on.htm
[OP]
Newbie
Oct 10, 2020
5 posts
Rnbmp32 wrote: If there is no withholding tax and assuming the stock price will drop by the exact amount of the dividend then this site gives you the rates assuming you’re living in Ontario.

It’s been many years since university days but I’m not sure if the stock prices by exactly the amount of the dividend vs dividends less tax and some other factors.

I think the market is much less efficient than what theory suggests.


https://www.taxtips.ca/taxrates/on.htm
Do you know which column will the foreign capital gain and foreign dividend be applied to?
Deal Addict
Dec 4, 2011
1869 posts
1473 upvotes
Montréal
foreign dividend = other income
foreign capital gains = capital gains
Newbie
Apr 20, 2002
36 posts
18 upvotes
Foreign capital gain is just capital gain.

Foreign dividend income is other income
[OP]
Newbie
Oct 10, 2020
5 posts
Rnbmp32 wrote: Foreign capital gain is just capital gain.

Foreign dividend income is other income
Thanks!
Sr. Member
May 2, 2019
539 posts
648 upvotes
Vancouver
EricC7138 wrote: 2.I can sell the stock before ex-div date @$105, and then repurchase it back after ex-div date @$100, this will result me having a $5 as capital gain.
My "friend" may have done something like this a while ago. At this time however, I believe this is not a legal way to reduce your taxes. CRA has a General Anti-Avoidance Rule - section 245 of the Income Tax Act. Basically, if a transaction or a series of transactions are done with a sole purpose of reducing your taxes, you shouldn't be allowed to take advantage of that. In the quoted approach, it's hard to think of any bona fide purpose of these transactions other than reducing the taxes. Even if we don't know for a fact how the CRA sees this approach, it appears to be a rather clear example of avoidance.

There are several practical issues as well. Commissions/spreads to pay, obviously. Inability to defer capital gains; this may trigger extra taxes for a number of years that you could have deferred. Superficial losses add to that; stock goes up you pay tax, goes down later the same year and you cannot claim the loss immediately. More work at the tax season, with extra transactions and any superficial losses. Bottom line, you may not even save much/anything and you'd create a potential problem with the CRA.
[OP]
Newbie
Oct 10, 2020
5 posts
yvrbanker wrote: My "friend" may have done something like this a while ago. At this time however, I believe this is not a legal way to reduce your taxes. CRA has a General Anti-Avoidance Rule - section 245 of the Income Tax Act. Basically, if a transaction or a series of transactions are done with a sole purpose of reducing your taxes, you shouldn't be allowed to take advantage of that. In the quoted approach, it's hard to think of any bona fide purpose of these transactions other than reducing the taxes. Even if we don't know for a fact how the CRA sees this approach, it appears to be a rather clear example of avoidance.

There are several practical issues as well. Commissions/spreads to pay, obviously. Inability to defer capital gains; this may trigger extra taxes for a number of years that you could have deferred. Superficial losses add to that; stock goes up you pay tax, goes down later the same year and you cannot claim the loss immediately. More work at the tax season, with extra transactions and any superficial losses. Bottom line, you may not even save much/anything and you'd create a potential problem with the CRA.
I agree with you that there are several practical issues in play. Everyone's situation is different, for me I want to realize the capital gain because I believe my tax bracket will be higher in the future. So realized a capital gain is actually a good thing for me.

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