Betty, Barbra, and Becky Larson are sisters who live in the same city. Due to disparate life choices, they have experienced varying degrees of economic success. Because of this, their additional income will be taxed at different rates as follows:

Betty Barbra Becky

Federal Marginal Tax Rate 15% 20.5% 33%

Provincial Marginal Tax Rate 8% 12% 20%

In 2018, the three sisters bought a block of lottery tickets and agreed to an equal sharing of any winnings. One of the tickets turned out to be a winner, and they shared a $60,000 prize.

They each intend to invest their $20,000 on January 1, 2020 and are considering the following alternatives:

Corporate Bonds Corporate bonds that provide a 5 percent coupon rate. These bonds can be purchased at their maturity value. They mature in 20 years.

Preferred Stock Preferred shares are available at a price of $25 per share. These shares pay a non-cumulative dividend of $1.50 per share.

The income from these investments would not move any of the three sisters to a higher federal or provincial tax bracket. The provincial dividend tax credit on eligible dividends is equal to 27 percent of the dividend gross up. Each sister has sufficient income to use all of her available tax credits.

Required: 

Advise each of the Larson sisters as to which investment they should make. As part of your recommendation, calculate the after tax income that would be generated for each of the sisters, assuming that they invested their $20,000 in:

a). The corporate bonds.

b). The preferred stock.

The country of taxation is Canada