How Investment Income is Taxed in Canada
How Investment Income is Taxed in Canada
Interest, Dividends, Capital Gains, and Foreign Income — What You Need to Know
Not all investment income is taxed the same and knowing the difference can help you keep more of what you earn. Whether you're investing for retirement, a child’s education, or long-term growth, understanding how your income is taxed is key to making smarter financial decisions.
Below, we break down the four most common types of investment income and how they’re treated by the Canada Revenue Agency (CRA), using examples based on a 37% marginal tax rate.
1. Interest Income
What it is: Interest earned from savings accounts, GICs, term deposits, and bonds.
How it’s taxed:
- Fully taxable at your marginal tax rate
- No special deductions or credits
- Least tax-efficient form of investment income
Example: If you earn $10,000 in interest income, you could owe up to ~$3,700 in tax — leaving you with ~$6,300.
2. Eligible Dividend Income (from Canadian Companies)
What it is: Dividends paid to you by Canadian publicly traded companies.
How it’s taxed:
- Grossed up by 38% before tax is calculated
- Eligible for the dividend tax credit
- More tax-efficient than interest income
Example: $10,000 in dividends is grossed up to $13,800. After the dividend credit, your tax may be only ~$2,200 — leaving you with ~$7,800.
3. Capital Gains
What it is: Profit from selling investments like stocks, ETFs, or property.
How it’s taxed:
- Only 50% of capital gains are taxable
- Often the most tax-efficient investment income
Example: A $10,000 gain = $5,000 taxable. At 37%, that’s ~$1,850 in tax — keeping ~$8,150.
4. Foreign Investment Income
What it is: Interest or dividends from U.S. or international stocks.
How it’s taxed:
- Fully taxable at your marginal rate
- No dividend tax credit
- May be subject to withholding taxes (e.g., 15% US)
- May qualify for foreign tax credit to reduce double taxation
Tip: Holding foreign investments inside an RRSP may reduce or eliminate withholding taxes.
Tax Comparison: $10,000 of Income
| Income Type | Taxable Amount | Tax Owed | After-Tax Income |
|---|---|---|---|
| Interest | $10,000 | ~$3,700 | ~$6,300 |
| Eligible Dividends | $13,800 (grossed-up) | ~$2,200 | ~$7,800 |
| Capital Gains | $5,000 | ~$1,850 | ~$8,150 |
| Foreign Income | $10,000 + FWT | ~$3,700+ | ~$6,300 or less |
Smart Planning means Lower Taxes
With careful planning, you can make your investment income more tax-efficient:
- Hold interest-earning investments in registered (tax-sheltered) accounts
- Use dividend and capital gain strategies in non-registered accounts
- Harvest capital losses to offset gains
- Apply all available tax credits
Let’s Talk About Your Investment Tax Strategy
Curious how to keep more of your investment income? Book a complimentary consultation with our team to review your strategy and explore tax-smart solutions for your portfolio.
Disclaimer:
The information provided on this page is intended for general educational purposes only and does not constitute personalized tax, legal, or financial advice. Tax laws and rates in Canada are subject to change, and their application may vary based on individual circumstances. While we strive to keep content accurate and current, we recommend consulting your tax professional or financial advisor to address your specific situation. Macnaughton & Ward Financial Services Ltd. assumes no liability for any decisions made based on the information presented.
