How are my investments taxed?

It’s officially tax season, which means your mailbox is probably full of envelopes marked “Important tax documents enclosed.” With so many documents such as T4s, T4RIFs and various T5008s, it can be overwhelming to understand what each form means. Let's look at how your investments are taxed.

Interest income and how it’s taxed

Interest is the income you receive from certain types of accounts and investments or from lending money to someone else. The most common accounts and investments that produce interest income include:

• Interest on savings accounts and guaranteed investment certificates (GICs)
• Interest on fixed-income investments, such as government or corporate bonds.

Interest is taxed as ordinary income, with no special tax treatment.

Dividends and how they’re taxed

A dividend is a distribution by a company to its shareholders, although not all companies pay dividends. Dividends received from Canadian companies are eligible for preferential tax treatment, while dividends earned from any foreign companies are taxed as ordinary income.

Canadian dividends are taxed according to the type; eligible or non-eligible. Generally speaking, eligible dividends are paid by publicly traded companies such as those on the Toronto Stock Exchange, while non-eligible dividends are paid by private companies which are known as Canadian-Controlled Private Corporations (CCPCs).

Both eligible and non-eligible dividends from Canadian corporations are eligible for the dividend tax credit, although the calculations are different depending on the type of dividend. In both cases, however, the dividend tax credit helps reduce the amount of tax owing and hence dividend income is taxed more favourably than interest income.

Capital gains and how they’re taxed

A capital gain is an increase in an asset's value above the original purchase price. Capital gains are generally taxable when 'realized', which is generally when the asset is sold. However, capital gains can also be realized in the form of a mutual fund capital gain distribution, meaning you could have capital gains even if you didn’t sell the fund. These distributions are typically reported to you on a T3 or T5 depending on the type of fund.

Capital gains don't have a specific tax rate, but rather, have an 'inclusion rate', which means that a portion of the capital gain is included in your income. The Government of Canada proposed changes to the capital gains inclusion rate as of June 25, 2024 your total realized capital gains from all sources in the year are $250,000 or below, 50% of your gain is taxed at your marginal tax rate. For the component of your total realized capital gain above $250,000 in a particular year, 66.67% of the capital gain will be taxed at your marginal tax rate.

Tax rates by province

Current as of January 1, 2025

Stay informed

Understanding the tax implications of your investments can be challenging but worthwhile, as careful tax planning can help lower your tax bill and create a more tax-efficient investment portfolio. We recommend working with your financial advisor and tax professional to manage your investments and take advantage of any available tax planning opportunities.