There are various tax consequences associated with the ownership of stock.

Dividends

Because of the dividend tax credit, an individual receiving dividends from a Canadian resident corporation is subject to tax at a favourable rate. Dividends are taxed anywhere from 14 % to 17% lower than ordinary income, for an individual in the highest marginal tax bracket, depending on the province of residence. For example, in Ontario the highest marginal tax rate on ordinary income such as interest is about 51.6%, while the highest rate for dividend income is about 34.9%.

Corporate dividends typically provide before-tax yields that are lower than debt instrument (interest) yields. Because of the lower dividend tax rate however, on an after-tax basis yields on dividends may approximate and even exceed yields on interest income.

Market comparisons can be made regarding current corporate dividend rates and corporate bond interest rates. Because of the difference in tax rates and tax status among the market participants, after-tax yields on debt (interest) and equity (dividends) will rarely be the same for any particular investor. The yields will also depend on the relative market demand for debt versus equity investments. Dividends received from non-Canadian resident corporations are fully included in income and no dividend tax credit is available.

Sale of Stock

Except where the individual is considered to be in the business of stock trading or the particular sale is considered an “adventure in the nature of trade”, a sale of stock by an individual will give rise to a capital gain or loss.

The capital gain on the sale of stock equals the proceeds of disposition (normally, the sales price) minus the adjusted cost base of the stock (normally, the vendor’s cost of acquiring the stock) and any expenses incurred on the sale of the stock (e.g. brokerage commissions). Only one half of the capital gain is taxable, and is included in income. If there is a capital loss, two-thirds of the loss becomes an “allowable capital loss”, which can only be used to offset taxable capital gains.

Convertible Stock

The most common type of convertible stock is convertible preferred shares. These are ordinary preferred shares that are convertible into shares of another class of the same issuing corporation. The preferred shares are normally convertible into common shares. The conversion of convertible shares into other shares of the same corporation takes place on a tax-free basis. See subsection 51(1)ITA. In particular, the conversion is deemed not to be a disposition of property, and the shareholder’s cost basis of the convertible shares is carried over to the common shares. This “rollover” treatment applies only to convertible shares that are capital property of the shareholder.

Election on Disposition of Canadian Securities

A taxpayer may elect that gains and losses on dispositions of Canadian securities in a year and all future years be treated as capital and not ordinary. See subsection 39(4), Income Tax Act.

Capital Gains Exemption for Shares in Qualified Small Business Corporations (QSBCs)

The 2000 federal budget proposed changes that would permit individuals (excluding trusts) to rollover capital gains on the disposition of a small business investment where the proceeds of disposition are used to purchase other small business investments.