Investors and tax
The taxes you’ll pay on your investments and ways to shelter your investments from tax.
If you hold your investments in a non-registered account
Non-registered investment accounts have no special “tax status” the way registered accounts, such as RRSPs or TFSAs, do.
All investments held in non-registered accounts are subject to tax, but not all investment income is taxed in the same way or at the same rates. Some investment income attracts less tax than others. This creates opportunities to minimize your overall taxes by using certain types of accounts to hold specific asset classes.
As an investor, you’ll pay taxes on:
- interest-bearing investments
- dividend-paying investments
- capital gains
- foreign investments.
How much tax you’ll pay depends on 4 things:
- The type of investment you made
- The tax laws where you live
- Whether your investments are held in a tax-sheltered plan
- Your income
How interest income is taxed
Any interest you earn on an investment is taxed as income at full rates. This means you pay tax on 100% of any interest income you earn. The rate you pay depends on your marginal tax rate.
How dividends are taxed
Follow these 6 steps to calculate the tax you’ll pay on investments that pay dividends.
- Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies.
- Multiply by 1.38. This number is your grossed-up dividends. (The amount added to the actual dividends is called the dividend gross up.)
- Add your grossed-up dividends to your income for the year.
- Calculate the tax on that grossed-up amount.
- Claim a federal dividend tax credit of approximately 15% of the grossed-up dividends.
- Claim a provincial tax credit based on where you live.
Dividends other than eligible dividends
For dividends other than eligible dividends (for example, those paid by small business corporations) paid in 2014 and 2015, the gross-up factor will be 18% and the federal dividend tax credit will be 11.0169% of the grossed-up dividends.
The 2015 federal budget announced a gradual decrease to the federal small business tax rate from 11% to 9% between 2016 and 2019. As a result, for 2016, the gross-up factor will be 17% and the dividend tax credit will be 10.5% of the grossed-up dividends. Further adjustments to the gross-up factor and the dividend tax credit will be made in 2017 and beyond.
Learn more about how dividends are taxed.
How capital gains from Canadian corporations are taxed
If you sell an investment for more than you paid for it, you get a capital gain. If you sell for less than you paid, you get a capital loss. At tax time, you subtract your capital losses from your gains. This gives you your net gains. You pay tax on 50% − or half − of your net gains.
How foreign investments are taxed
If you receive interest, dividends or capital gains from investments outside Canada, the equivalent Canadian dollar value must be reported on your Canadian tax return and will be taxed accordingly. Foreign dividends do not qualify for the dividend tax credit. Interest-bearing investments like Certificates of Deposit (CDs) from the United States are taxed as income.
A withholding tax may be deducted from your foreign investment income. However, you may be able to claim a foreign tax credit to prevent double taxation.
If you own specified foreign property costing more than $100,000, you must complete form T1135, Foreign Income Verification Statement, which can be filed electronically. For taxpayers with less than $250,000 of specified foreign property, the reporting method has been simplified for 2015 and future tax years. However, detailed reporting is still required for those with foreign property costing more than $250,000.
Labour sponsored venture capital corporations
The federal tax credit on investments in labour-sponsored venture capital funds, once a popular investing product, will be phased out beginning in 2015 and eliminated altogether for tax years after 2016.
3 ways to reduce your taxes
1. Invest in tax-sheltered investments and plans
You don’t pay tax on what you earn while your money is in the investment or plan, but certain withdrawals are fully taxed as income. Examples: RRSPs, RESPs, RRIFs and permanent insurance. With a TFSA, you don’t pay any tax on what you earn while your money is in the plan – or when you take it out.
To take advantage of the lower tax rates on dividends and capital gains, consider:
- holding your interest-bearing investments inside a tax-sheltered plan, and
- keeping investments that pay dividends or create capital gains outside the plan.
2. Apply capital losses to reduce tax on unsheltered capital gains
At tax time, you’ll add up all your gains and losses from buying and selling unsheltered investments. If you come out ahead, you have a net gain to report. Only 50% of this amount is taxable. If you lose money overall, you must declare a net loss. A net capital loss cannot be used to offset other sources of income.
However, you can carry a net capital loss back for 3 years to offset net capital gains in those years and claim a refund. Or, you can carry it forward indefinitely to offset future net capital gains. You can also apply your capital losses from previous years to offset new capital gains. Speak with a chartered professional accountant who specializes in income tax to help you figure out the best approach.
3. Make Canadian dividends your only source of income
If you have no other sources of income in 2015, individuals with an incorporated private company or a substantial amount of money to invest can receive an amount of Canadian dividends tax-free. The actual amount depends on the province and whether the dividends are classified as eligible or non-eligible.