Canadian General Investments Ltd.: Mastering Tax Efficiency in a Low-Yield World

In an era where traditional income-generating assets like bonds and bank deposits offer paltry yields, investors are increasingly turning to equities to preserve and grow wealth. Yet, the challenge remains: how to maximize returns while minimizing the drag of taxes. Canadian General Investments Ltd. (CGI) presents a compelling case study in this regard, leveraging a dual-dividend structure that not only enhances shareholder value but also aligns with the tax code to create a more efficient path to long-term capital growth.

The Dual-Dividend Strategy: A Tax-Efficient Engine

CGI's approach hinges on a strategic blend of regular (taxable) dividends and capital gains dividends. Recent declarations, such as the $0.27 per share payout in 2025, are classified as capital gains dividends—a critical distinction. Unlike regular dividends, which are taxed as income, capital gains dividends are treated as a return of capital, effectively reducing the investor's cost basis rather than triggering immediate tax liability. This structure allows CGI to recover corporate-level taxes on realized gains, passing on more value to shareholders.

For example, in 2025, CGI's capital gains dividend of $0.27 per share avoids an additional layer of taxation at the corporate level, which would typically reduce the payout. By design, this creates a compounding effect: shareholders receive more capital to reinvest, while the tax burden is deferred until the asset is sold. This is particularly advantageous in a low-yield environment, where every percentage point of after-tax return matters.

Tax Advantages for Canadian Investors

The benefits of CGI's strategy are amplified by Canada's dividend tax credit (DTC). Eligible dividends, such as those from CGI, are taxed at a lower effective rate compared to interest income. For investors in the highest tax brackets, the effective tax rate on eligible dividends is around 39%, versus 53% for interest. This disparity turns CGI's dividends into a more attractive option for income-focused portfolios.

Moreover, CGI's ability to pay dividends from both income and capital gains provides flexibility. In 2024, all four quarterly dividends were fully covered by income, but the shift to capital gains dividends in 2025 reflects a calculated move to optimize tax efficiency. With $0.8 billion in unrealized capital gains, CGI can sustain this strategy for years, ensuring that its payout ratio remains healthy while shielding shareholders from excessive tax drag.

Long-Term Outperformance and Strategic Discipline

CGI's tax-efficient framework is underpinned by a disciplined investment philosophy. Over the past 25 years, the fund has delivered 9.6% annual total returns, outpacing the S&P/TSX Composite Index. This outperformance is driven by a mix of prudent security selection, timely realization of gains, and a long-term horizon. By focusing on high-quality assets and harvesting gains strategically, CGI creates a feedback loop: higher returns generate more capital gains, which are then distributed tax-efficiently to shareholders.

The 12.1% annual return over 50 years further cements CGI's status as a compounding machine. In a low-yield world, where inflation erodes the value of cash and fixed-income assets, CGI's ability to generate double-digit returns with tax optimization is a rare and valuable asset.

Investment Implications and Recommendations

For investors seeking to build a resilient portfolio, CGI offers a blueprint. Its dual-dividend structure is a defensive mechanism against tax erosion, while its long-term outperformance suggests a sustainable model. The recent 8% year-on-year dividend increase (from $1.00 to $1.08 per share annually) signals confidence in future earnings and reinforces CGI's position as a dividend growth leader.

However, investors should consider the broader context. While CGI's strategy is tax-efficient, it is not without risks. Market volatility could temporarily reduce the availability of capital gains, and shifts in tax policy—such as changes to the dividend tax credit—could alter the equation. That said, CGI's 11-year dividend growth streak and its status on the AIC's next-generation dividend heroes list indicate strong management commitment to shareholder returns.

In conclusion, CGI's dual-dividend strategy is a masterclass in tax efficiency. By aligning its payout structure with favorable tax treatment and leveraging its long-term investment edge, CGI creates a compelling value proposition for investors navigating a low-yield environment. For those prioritizing after-tax returns and capital appreciation, CGI is not just a stock to watch—it's a model to emulate.