It is that time of year when focus turns to filing an annual tax return. To make sure you have a grasp on your situation, we have provided a practical overview of how investments are taxed in Canada. The following focuses on what affects your returns and therefore, your decisions to preserve your wealth.
Given any number of variables, everyone's situation can be different, so it is vitally important that you contact our office before you file your return to make sure you are not paying too much tax.
1) Types of Investment Income
Interest Income
- Includes savings accounts, GICs, and bonds
- Fully taxed at your marginal tax rate
- Least tax-efficient
Capital Gains
- Profit from selling investments
- Only 50% of gains are taxable
- Example: $10,000 gain → $5,000 taxable
Dividends
- Paid by Canadian corporations
- Eligible for dividend tax credit
- More tax-efficient than interest
2) Investment Accounts
TFSA (Tax-Free Savings Account)
- No tax on gains, dividends, or withdrawals
- Best for growth investments
RRSP (Registered Retirement Savings Plan)
- Contributions reduce taxable income
- Growth is tax-free
- Withdrawals are fully taxed
RESP (Registered Education Savings Plan)
- Tax-deferred growth
- Withdrawals taxed in student’s hands
Non-Registered Accounts
- Tax applies annually
- Includes interest, dividends, and capital gains
3) Foreign Investments
- Foreign dividends are fully taxable
- May be subject to withholding tax (e.g., 15% U.S.)
- RRSPs may avoid U.S. withholding tax
- TFSAs do not avoid withholding tax
4) Capital Losses
- Can offset capital gains
- Carry back 3 years
- Carry forward indefinitely
5) Tax Tips
- Use RRSP for interest-heavy investments
- Use TFSA for growth investments
- Hold tax-efficient investments in taxable accounts
- You are taxed on capital gains only when you sell
6) Capital Gains Update
- First $250,000 of gains: 50% taxable
- Above $250,000: 66.67% taxable
Summary
- Interest = highest tax
- Capital gains = moderate tax
- Dividends = tax-efficient
- TFSA = tax-free growth
- RRSP = tax-deferred growth
Taxes can be complicated; however we are here to make it easy for you. Just connect with our tax experts to ensure that you are only paying the amount of tax you are legally required to pay.