AP $7-4($Dividend vs$.$ Interest Income$)$

Affrielle, Deyna, and Kamla Malti are sisters who are Canadian residents living in Ontario. Over the

years, they have enjoyed varying degrees of financial success. As a consequence, they are cur$-$

rently subject to significantly different marginal income tax rates as shown in the following table:

In $2022,$ their father and mother both died. Their will leaves all of their property to their three daugh$-$

ters to be shared equally. While it will take some time for their estate to be completely settled, the

trustee was able to distribute cash of $$100,000$ to each of the three sisters in $2022.$

Each of the sisters intends to invest their $$100,000$ share of the distribution on January $1,2023.$

They are considering the following two investment alternatives:

Corporate Bonds Corporate bonds that provide a $6\%$ interest rate. These bonds can be

purchased at their maturity value. The bonds mature in $3$ years.

Common Shares The common shares are available at a price of $$50$ per share. These

shares pay a well$-$established annual eligible dividend of $$3\mathrm{.}25$ per share.

The income from these investments would not move any of the three sisters to a higher federal or

provincial income tax bracket. The provincial dividend tax credit on eligible dividends is equal to $25\%$

of the dividend gross up$.$ Each sister already has sufficient income to use all of their available per$-$

sonal tax credits.

Required: Advise each of the Malti sisters as to which investment they should make. Include a

calculation of the annual after$-$tax return that would be generated for each of the sisters, assuming

that they invested their $$100,000$ in

A$.$ the corporate bonds.

B$.$ the common shares.

Comment on any other factors they should consider in making their choice.