Are dividends taxed when withdrawn from a TFSA? - MoneySense

Do I pay tax on dividends after I withdraw my fund from a TFSA?

Why dividend paying investments are a good fit for TFSAs

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Q. My TFSA is maxed out and I hold EIT Income Fund (EIT.UN-T) which is a high-paying dividend stock. My pension income is minimal and I’ll be using the dividend as investment income soon. Presently, I am on the DRIP with my dividends. I don’t think I’ll have to pay tax when I use this dividend as income. Am I correct in this assumption?

– Thanks, Dan

A. You almost got me, Dan. Your question reminds me of a tricky multiple choice question on an exam. You’re correct, it’s not taxable income but maybe not for the reason you think.

If you’re holding the EIT.UN inside your TFSA, as you are, then anything you draw out of the TFSA is tax-free. It doesn’t matter if it is capital gain, interest, or dividend income, it is all tax-free.

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If the investment is held in a non-registered account then the dividend income is considered taxable. It doesn’t matter if you’re participating in the DRIP or taking it as income.

The company will send a T5 to CRA so there is no hiding the dividends. As a tip, it doesn’t hurt to visit your CRA “My Account” before you file your taxes to see what T-slips the CRA has for you. Even if you check My Account and you don’t see your T-slip it doesn’t mean you don’t have to declare the dividends, it is likely CRA will catch up with it at some point.

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One advantage of holding dividend-paying funds in a TFSA is you may avoid some clawback issues caused by the dividend gross-up. When you report eligible dividend income on your tax return you need to gross it up by 38%, so if you have $100 of dividend income you’ll report $138 on your return. This higher income can cause a reduction in your OAS, the age credit, or GIS benefits. Of course, as you progress through your tax return you’re able to claim the dividend tax credit to bring your income back down, but not before some of your other benefits such as the OAS, age credit, and GIS is affected.

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When you use dividend income for income you have to declare it and pay tax. The exception is when you have no other income and your only income is from eligible dividends. Then you can earn about $50,000, depending on the province, and pay no tax. But if all of your money is in a TFSA there is no tax on the dividends.

Allan Norman, M.Sc., CFP, CIM, Atlantis Financial/IPC Investment Corp

*This commentary is provided as a general source of information and is intended for Canadian residents only. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation.

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