Maxing your Tax-Free Savings Account (TFSA) doesn’t mean you have to stop investing. A regular taxable investment account can hold additional savings, and eligible Canadian dividends receive a tax credit that ordinary interest doesn’t.
That doesn’t make the account better than a TFSA. It means the next dollar deserves a different calculation. The useful question is how much income remains after tax, and whether that income affects benefits you receive.
Source: Getty Images
The credit has a reason
A Canadian corporation generally pays corporate tax before distributing earnings. The eligible-dividend system tries to recognize that tax when an individual receives the payment. The dividend is increased for tax reporting, then dividend tax credits reduce personal tax.
Suppose you receive $1,000 of eligible Canadian dividends. The 38% gross-up means $1,380 is reported as taxable dividend income. The federal credit is approximately $207.27, calculated using the prescribed rate on that grossed-up amount.
For example, assume the additional $1,380 faces a 20.5% federal tax rate and the full credit is usable. Federal tax before the credit is $282.90, and after the credit, it’s about $75.63. By comparison, $1,000 of interest at that same assumed federal rate produces $205 of federal tax.
This excludes provincial tax, benefit changes, and bracket crossings. It isn’t a quote for every Canadian. Provinces provide their own treatment, and the final result depends on the person’s complete return. Furthermore, foreign dividends don’t qualify for the Canadian dividend tax credit.
CM
Canadian Imperial Bank of Commerce (TSX: CM) designates its ordinary common dividends as eligible unless it indicates otherwise. Its declared quarterly payment was $1.07, or $4.28 annualized.
At a recent close of $155.63, a $20,000 budget bought 128 whole shares for $19,920.64. Those shares generated $547.84 annually at an unchanged dividend. The starting yield was approximately 2.75%, before tax and trading costs.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| CM | $155.63 | 128 | $4.28 | $547.84 | Quarterly | $19,920.64 |
CIBC’s latest adjusted quarterly earnings were $2.73 per share. The $1.07 dividend used about 39% of that amount. That supports the payment, while leaving the bank exposed to Canadian borrowers and housing conditions.
The tax credit doesn’t improve the bank’s business. CIBC’s domestic client relationships and wealth operations support earnings, but weaker employment and mortgage stress can raise loan losses. Dividend investing needs to start with that business evidence.
The tax break has limits
The gross-up can affect income-tested benefits. A retiree receiving $1,000 in eligible dividends reports $1,380, which can matter around an OAS recovery threshold even though only $1,000 arrived in cash.
An eligible TFSA avoids that Canadian taxable-income addition. The regular account is a useful overflow option once available room is used, not a way to pay less than zero tax on the same eligible Canadian income.
An RRSP may still deserve priority if a working-year deduction is valuable, especially with an employer match. Its ordinary withdrawals are taxed later. There isn’t one account order that works for every income level and goal.
CIBC’s quoted price was about 14.3 times its latest adjusted quarterly earnings. That rough valuation supports a measured income holding, with some improvement already reflected in the price. The tax credit provides no reason to overpay or concentrate all savings in banks.
Bottom line
A taxable account lets investing continue after the TFSA is full. Eligible Canadian dividends can face less personal tax than interest, but the gross-up and benefit effects deserve attention. CIBC offers a covered payment, though the account decision determines what reaches your budget. Meanwhile, the purchase price determines whether the stock is worth owning.
