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How to make almost an extra $500K over your lifetime: Comparison of dividends versus salary & capital gains

Dividends (depending on your province) are a great way to make an income and pay barely anything in taxes.

If you’re tax efficient, $30,000 in income is NOT EQUAL across the board. Whether you get it in dividends, capital gains, or salary, it all changes your tax load.

So let’s do a comparison between salaried $30K and dividend-paid $30K.

Corporations pay eligible dividends (as in, eligible for a tax credit), and small businesses like mine, when I pay myself, pay eligible dividends as a salary (that is, if we don’t have a payroll and pay ourselves a salary). Read: Eligible versus Non-Eligible Dividends.

Therefore, this table for eligible dividends looks like this:

As you can see, I can receive up to $30K in dividends, have it be a taxable income of $41,400 (there is a tax gross-up), and in Quebec, pay $786 in taxes.

If I go up to $50K? I pay $1957 in taxes.

In some other areas, you either pay $0 in taxes, or you even get a tax credit from having dividend income

I of course, live in a province like Quebec (or ON) that doesn’t care if you leave for another one, so they tax you. Quebec has the highest tax actually, at $788 for $30K.

If we look at taxes for regular salaried income at $30K in Quebec, this is what you’ll see:

So if we do a quick little chart using $30K of income, here is how much more tax you’ll be paying:

If we take those amounts, let’s use these details:

  • Age 40 to retire at Age 65
  • $6900 a year back from taxes or $575/month
  • Assume a 7% return on investments

You’d have almost $500K extra at the end of it all, in 25 years.

That’s assuming of course, you took that $6900 and invested it instead of spending it.

If we look at capital gains, the returns are lower, but still significant at almost $200K extra in your pocket just from a little tax efficiency.

Now you know why being tax efficient makes a big difference.

A lot of people don’t know about this ‘trick’ because it also takes a lot of work and investment capital to reach $30K in income, so it can replace your day job paying the same salary with very little work, comparatively speaking.

Investing your savings, takes time, and sacrifice in not spending it.

For a dividend income of $30K, you’d need anywhere from $600K to $1M in your invested capital, as it depends on your yield.

Convinced? Let me know.

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