Personal Finance

Question on extra-ordinary dividend

  • Last Updated:
  • May 21st, 2010 4:08 pm
[OP]
Newbie
Mar 22, 2009
36 posts
5 upvotes

Question on extra-ordinary dividend

Hi,

I was wondering if someone can share their thoughts on the below scenario which relates to extra-ordinary dividend paid out by a Canadian company:

Company A stock price is $25
They declare a special dividend of $3
Share price goes up to $26
100 shares are bought at $26 before the payout - total investment $2600
Few days later, the dividend is paid out - buyer receives $300
Share price automatically falls by dividend amount - and is now $23

My questions are:

1. Can the stock be sold and a capital loss of $300 be claimed ($2600 less $2300)?
2. Is extra-ordinary dividend given any different tax treatment?
3. Is there a favorable tax implication on this transaction? Claim of capital loss and claiming dividend income

Thanks in advance - I will consult a qualified advisor but thought of seeing what you all think as well.
4 replies
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
you're talking about sears aren't you?

1. yup
2. stock should tell you, probably the same.
3. depends on your margin rate. it's possible but not really worth it imo.

assuming u have somewhere 300 cap gains the 300 cap loss cancels that out.
in theory it should be beneficial up to 127,021 income.

in practice is another matter.
[OP]
Newbie
Mar 22, 2009
36 posts
5 upvotes
Xlfe thank you for your reply. Yes, I was talking about Sears. If it is not too much trouble, can you share your thoughts on why it would not be worth it? Wouldn't the potential tax savings assuming a high marginal rate make the net return significantly higher?

Thanks again,
Deal Addict
User avatar
Sep 26, 2007
3960 posts
146 upvotes
SC
I can try to explain,

The bottom chart shows the tax credit based on year as actual dividend. Notice this value doesn't change with income, this is a fixed value of 9.22% in ON for 2010 tax year.

The value is really for comparison.
In your example, having 300 cap gains would in theory lead to a tax implication
of $300 / 2 * MTR. = 150*MTR

If you collected dividends and sold at a cap loss.
In this example, having 300 dividend credit would in theory lead to a tax implication
of $300 * MTR - $300*9.22% = $300 * MTR - 27.66

basic algebra the point at which both would be the same.
150MTR = 300MTR - 27.66
150MTR = 27.66
MTR = 18.44%

It is better to keep it as capital gains if your MTR is > 18% if you are from ON.

This is how i would calculate it, I don't see a mistake in my logic but i have to say it doesn't correspond to their chart here
at their 22% MTR it is saying there would only be a 5.8% tax implication.
meaning you would only be paying 300 * 5.8% = $17.40
where as in my calculation you would pay 300*22% - 300*9.22% = $38.34

My only reason for this difference is which part of the country they used their numbers from. If it was from QC you would pay 300*22% - 300*17.14% = $14.58.

I conclude if you make high income, it is more beneficial to have capital gains than dividend income in Ontario.
Deal Addict
Feb 24, 2007
1371 posts
55 upvotes
Or more simply put without all that unnecessary explanation, if marginal cap gains tax rate is higher then marginal dividend rate, then makes sense to take cap loss in exchange for dividend income, because you'll be saving more in taxes with the cap loss then taxes from the dividends. This all assumes 0 transaction costs and you can use the cap loss same year, otherwise becomes more complicated with figuring time value of money etc.

Just look up taxtips.ca and compare the two rates given your income. Lower the income the better.

For example Ontario, caps gains tax rate are greater then enhanced dividend tax rate up to income of $81941. So would be worthwhile to do your maneuver up to that income level, again ignoring transactions costs, which at the low amounts of income you generated, might be more costly then the tax savings. A $10 trading cost represents 3.33% of your income, so tax difference would have to be at least greater then that.

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