BUSN-0171 TAXATION 1 Chapter 7 - 8 Assignment Question 1 (Dividend vs. Interest Income) Bill Martin, Dave Martin, and Charles Martin are three brothers living in the same province. They each have $20,000 that they wish to invest. Because of differences in their current employment situations, they are in different tax brackets. These brackets are as follows: Federal Provincial Tax Bracket Tax Bracket Bill Martin 15.0 Percent 6.0 Percent Dave Martin 20.5 Percent 9.5 Percent Charles Martin 29.0 Percent 14.0 Percent I The provincial dividend tax credit on eligible dividends is equal to 30 percent of the dividend gross up. For a number of years, they have been interested in the securities of Moland Industries, a Canadian public corporation, and on January 1 of the current year, they are considering two securities of the company that are currently outstanding. These securities and their investment characteristics are as follows: Bonds The company has a large issue of debenture bonds that has a coupon interest rate of 6 percent. They are selling at par value and mature in 18 years. Shares the company has an issue of shares that has reliably paid a dividend of 4 percent, and is expected to continue to do so. The income from these investments would not move any brother to a higher federal or provincial tax bracket Required: Advise each of the Martin brothers as to which investment he should make. Calculate the after tax income that would be generated for each brother during the current year, assuming he invests the entire $20,000 in either the bonds or the shares