Taxation of dividend stock distributions(not cash distrib)

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Taxation of dividend stock distributions(not cash distrib)

Postby luckych » 18 Mar 2012 11:02

Greetings everyone,

This year I have a rather non-typical situation with my taxes and would realy appreciate if someone could provide any advice on the proper way of calculating taxes on AIG.WS dividend stock distribution.

Here’s my situation:

I have a non-registered margin account with Questrade

In this account I held some US shares of AIG that on Jan 25, 2011 yielded 66 rather-strange warrant dividend shares of AIG.WS in my account. (http://www.savingadvice.com/forums/i...at-aig-ws.html)

At the time when these shares were deposited to my account the price of the original stock dropped for the equal amount and then after that the price for both shocks continued to be subject of market forces.

After that I sold both stocks in June at a loss. In particular, AIG.WS was sold for $8.96 per share for the total mount $586.39 US

This week I received my T5 slip from Questrade where this distribution of dividend stock was reported in Box 15 – Foreign income in the mount $1075.14

Now, here are my puzzles:

#1
I’m trying to figure out my capital gains/losses for both, AIG and AIG.WS. I’m confused and not sure how this $1074.14 amount reported in Box 15 – Foreign income of my T5 is going to impact my tax return. I obviously don’t want to pay extra taxes on $1074.14 which I have not physically received in cash but instead I received dividend shares AIG.WS which I sold later at a loss.

#2
Can I claim capital losses in the amount $1074.14 - $586.39 = $487.75 for AIG.WS dividend shares?

#3
Will this distribution of AIG.WS stock dividend have any effect on how I should calculate my capital gains/losses for AIG stock?



I would appreciate any feedback or help! Thank you!
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Re: Taxation of dividend stock distributions(not cash distri

Postby DavidR » 19 Mar 2012 12:51

Hello and welcome luckych

1. You're being taxed 'as if' they gave you a cash dividend of $1,075.14 and you used the money to buy the warrants. So you have to report the Box 15 amount in your income.

2. Your cost base for the warrants will be $1,075.14 so yes, claim a capital loss.

3. No effect on the cost base of the other shares.

See also the Stock Dividend thread http://www.financialwisdomforum.org/forum/viewtopic.php?f=32&t=114529 especially the January 29 posting re Foreign Spin-Offs
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Re: Taxation of dividend stock distributions(not cash distri

Postby luckych » 19 Mar 2012 17:52

Hi DavidR,

Thank you very much for the info! I really appreciate your help! :beer:

I also wrote the same question to http://www.taxtips.ca and they were kind enough to respond and clarify this for me as well. Here's the article they've published yesterday:

http://www.taxtips.ca/personaltax/inves ... rights.htm
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Re: Taxation of dividend stock distributions(not cash distri

Postby CROCKD » 26 May 2012 15:44

A personal analysis of the effect of dividend grossup.

2011 was the first year that I had a mandatory withdrawal from my RRIF. The effect of this on my income was to trigger OAS clawback.

I was curious as to how dividend grossup affected this.

Using the tax software that I netfiled my taxes with I ran two test cases to simulate the case of getting interest type income in place of dividend income with the tax credit.


Case A. I went through all my T3s and T5s that had dividends and replaced the amount of actual dividend with an equivalent amount in Box 26 (T3) other income or interest Box 13 (T5).


Case B. Recognizing that dividends are higher than interest bearing investments I approximated it by supposing that the dividend income was 4% and interest income at half is 2%.

So I reduced the amount of equivalent income by 50%

The Results. Cases A and B vs the Base case (the one I netfiled)

Case A. Tax payable increases by $500 even though the clawback is $186 less.

Case B. Taxable income is $2000 less. Tax payable is a sawoff an decrease of $3. The clawback is $349 less.

Conclusion: When you are in this territory there are no big advantages to getting dividend income rather than investing in fixed investments.

Fixed investments have less risk although they don't have the potential for capital gain OR loss.

Edit: There is probably a better thread for this but I could not find it with a Search
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Re: Taxation of dividend stock distributions(not cash distri

Postby like_to_retire » 26 May 2012 16:10

Conclusion: When you are in this territory there are no big advantages to getting dividend income rather than investing in fixed investments.


May I ask, in Case A and Case B, were you completely into clawback territory at all times? i.e. greater then $67668 for 2011?

I've been playing with this lately, as I find in a few years I'll be subject to clawback at age 65. I have a combo of dividend and interest income and am trying to come up with a best mix of the two to lower the overall taxes, taking the amount of clawback into consideration. The killer comes at age 72 with compulsory RRIF withdrawals, and trying to determine how much to draw down now to ameliorate that situation in the future.

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Re: Taxation of dividend stock distributions(not cash distri

Postby CROCKD » 26 May 2012 17:31

like_to_retire wrote:May I ask, in Case A and Case B, were you completely into clawback territory at all times? i.e. greater then $67668 for 2011?


Yes

Base Case Clawback 43%

Case A Clawback 40%

Case B Clawback 37%

The killer comes at age 72 with compulsory RRIF withdrawals, and trying to determine how much to draw down now to ameliorate that situation in the future.


With 20/20 hindsight between the ages of 65 and 72 I should have deregistered $70k - $100k from my RRSP.
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