Mr. David Miller, a retiree in British Columbia, is in a 30% marginal income tax bracket. He is considering two investment options for his non-registered account: Investment A, which pays eligible Canadian dividends yielding 4%, or Investment B, which provides interest income yielding 3%. Assuming a combined federal and provincial dividend tax credit rate that effectively reduces the tax on eligible dividends to 15% for someone in David's bracket, which investment provides a higher after-tax yield?

Question: Mr. David Miller, a retiree in British Columbia, is in a 30% marginal income tax bracket. He is considering two investment options for his non-registered account: Investment A, which pays eligible Canadian dividends yielding 4%, or Investment B, which provides interest income yielding 3%. Assuming a combined federal and provincial dividend tax credit rate that effectively reduces the tax on eligible dividends to 15% for someone in David's bracket, which investment provides a higher after-tax yield?

Answer options:

• Investment A with an after-tax yield of 3.4% ✅ Investment B with an after-tax yield of 2.1%
• Investment A with an after-tax yield of 3.6%
• Investment B with an after-tax yield of 2.7%

Correct answer: Investment B with an after-tax yield of 2.1%

Explanation: For Investment A (eligible dividends): After-tax yield = 4% * (1 - 0.15) = 4% * 0.85 = 3.4%. For Investment B (interest income): After-tax yield = 3% * (1 - 0.30) = 3% * 0.70 = 2.1%. Investment A is preferred.