The amount of tax you pay on your investments depends on the type of investments you hold, and the type of account they are held in.
On this page you’ll find
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 four things:
1. The type of investment you made
2. The tax laws where you live
3. Whether your investments are held in a tax-sheltered plan
4. 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
Your dividend income for the year will usually be shown to you on your tax slips including T5, T4PS, T3, or T5013. If you need more information about the type of dividends you received, contact the payer.
Follow these six steps to calculate the tax you’ll pay on investments that pay dividends.
Eligible dividends
1. Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies.
2. Multiply by 1.38. This number is your grossed-up dividends. (The amount added to the actual dividends is called the dividend gross up.)
3. Add your grossed-up dividends to your income for the year.
4. Calculate the tax on that grossed-up amount.
5. Claim a federal dividend tax credit of approximately 15% of the grossed-up dividends.
6. Claim a provincial tax credit based on where you live.
Dividends other than eligible dividends
For dividends other than eligible dividends, in 2020, the gross-up factor will be 15.0198% and the federal dividend tax credit will be 9.0301% of the grossed-up dividends.
Further adjustments to the gross-up factor and the dividend tax credit may be made in future years.
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.
Two 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.
- 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.
Summary
The two ways to reduce your taxes are to invest in tax-sheltered accounts and plans and apply your capital losses. Remember, your tax-sheltered investment options include:
- Depending on the type of investments you have and the account they’re held in – you must pay a certain amount of tax.
- Income that you earn on investments can be in the form of dividends, interest or capital gains.
- You will receive tax slips for dividend income that you’ll need to report.
- Your tax-sheltered investment options include: TFSA, RRSP, RESP, RRIF and permanent life insurance.
