Invest smart: Taxes and Investing

Investing can be a great way to grow your wealth, but it’s important to understand the tax implications that come with it. In Canada, the taxation of investment income varies depending on the type of investment and the account in which it is held. Here’s a high-level overview of how taxes work for different types of investments.

Types of investment income

Canadians are taxed on their worldwide income. Here are some of the more common types of income, deductions (lowers your taxable income) and credits (lowers your taxes dollar-for-dollar) that come up as a result of holding investments.

Interest Income: This includes earnings from savings accounts, bonds, GICs (Guaranteed Investment Certificates), mutual funds, ETFs and other interest-bearing investments. Interest income forms part of your total income reported on your tax return.

Dividends: When you invest in stocks, mutual funds and ETFs you may receive dividends. In Canada, there are two types of dividends:

Eligible dividends (from certain Canadian corporations) are grossed-up when added to your taxable income and receive a dividend tax credit on the grossed-up amount, which reduces the amount of tax owed.

Non-eligible dividends (often from smaller companies) are subject to a lower gross-up and dividend tax credit rate, meaning that the tax bill would be higher.

Capital Gains: When an investor sells an investment for more than they paid for it, the profit is considered a capital gain. In Canada, as of June 25, 2024, 66.67% of capital gains over $250,000 and 50% of capital gains under $250,000, are taxable at your marginal tax rate. This makes capital gains a more tax-efficient way to earn money compared to interest.

Learn more about how investment income is taxed at www.canada.ca.

Tax-Advantaged Accounts

Canada offers several tax-advantaged accounts that can help you minimize your tax burden.

• Tax-Free Savings Account (TFSA)
• First Home Savings Account (FHSA)
• Registered Retirement Savings Plan (RRSP)
• Registered Retirement Income Fund (RRIF)
• Registered Education Savings Plan (RESP)
• Registered Disability Savings Plan (RDSP)

If you are not investing in one of these accounts, the investment earnings will be included as income tax. For more information on tax-advantaged accounts please visit the Office of the Investor’s, Types of Investment Accounts or Savings Plans.

Reporting Investment Income

If you have reached the contribution limits in the tax-advantage accounts, you can open a non-registered account.

There are no tax benefits for non-registered accounts. Investment income held in a non-registered account must be reported on your annual tax return. This includes interest, dividends, and capital gains. The Canada Revenue Agency (CRA) requires taxpayers to keep accurate records of all transactions, including purchase and sale prices.

Familiarize yourself with the tax forms related to investments.

• T5 Slip: Reports interest and dividend income.
• T3 Slip: Reports income from trusts, including mutual funds and income trusts.
• T5008 Slip: Reports the proceeds of securities transactions.
• Schedule 3: Used to report capital gains and losses from the sale of investments.

Taxes and Foreign Investments

Interest, dividends, and capital gains from foreign investments must be reported in Canadian dollars on your tax return and will be taxed accordingly. A withholding tax may apply, but you can claim a foreign tax credit to avoid double taxation.

If you are a non-resident of Canada, different rules apply. You may be subject to withholding taxes on Canadian dividends and interest income.