Transcript: How is investment income taxed?

Runtime: 3:45

Debbie Pearl-Weinberg
Executive Director
Tax & Estate Planning, Financial Planning & Advice

When it comes to knowing how your investment income is taxed, you should understand this not just to properly report your income to the Canada Revenue Agency, but also because the type of investment income that you earn impacts the after-tax amount that you actually get to keep in your pocket.

[text reads: The type of investment income that you earn impacts the after-tax amount that you get to keep]

[Title reads: Interest income]

If you receive interest income, that’s fully included in your income at your marginal tax rate, which will differ depending on where in Canada that you live. Interest income is earned on anything from bank accounts, GICs, bonds and all sorts of different notes including principal protected notes.

[Text reads: Interest income is earned on anything from bank accounts, GICs, bonds, etc.}]

[Title reads: Capital gains]

[Text reads: Only 50% of capital gains you earn needs to be included in your income for tax purposes]

On the other hand, if you earn a capital gain, only 50% of the capital gain has to be included in your income for tax purposes. Also, you aren’t taxed on capital gains until an investment is sold, or deemed to be sold.

[Title reads: Canadian dividends]

Canadian dividends are also taxed at a preferential rate. The amount of the dividend is actually included in your income at a grossed up rate but then you get to claim a dividend tax credit and this reduces the overall rate of tax that you pay on Canadian dividends.

[Text reads: Claiming a dividend tax credit can reduce your overall tax rate paid on Canadian dividends]

This does not apply to foreign dividends that you earn. Those are fully included in your income, just like interest is.

[Text reads: This does not apply to foreign dividends that you earn]

[Title reads: Mutual funds]

Lots of people invest in mutual funds. You might receive income or gains that were earned inside the mutual fund that are flowed out to you as an investor. You also might realize a capital gain or a capital loss when you sell your investment in the mutual fund itself.

[Text reads: You may realize a capital gain or a capital loss when you sell your investment]

[Title reads: Income from foreign sources]

You may earn income from foreign sources. There are a couple things to keep in mind here.

First, whenever you are reporting or calculating your foreign income you need to first convert everything into Canadian dollars.

[Text reads: When you report or calculate your foreign income, convert everything to Canadian dollars]

The other thing to keep in mind when you receive foreign income is that there may be foreign withholding tax. Now for non-registered accounts, generally you get a foreign tax credit in Canada to offset the foreign tax that was withheld.

[Text reads: There may be foreign withholding tax]

[Part six: Claiming expenses]

You may be wondering if there are any expenses that you can claim to offset the investment income that you earn. If you pay someone to manage your portfolio those fees may be deducted so long as your investments are not held inside a registered plan.

[Text reads: Portfolio management fees may be deducted for investments no held inside a registered plan]

Also, if you borrow to invest outside a registered plan, generally you can deduct loan interest you are charged so long as the investments that you purchased have the potential to earn income.

[Text reads: If you borrow to invest outside a registered plan, generally you can deduct loan interest]

[Part seven: Registered plans]

For those investments held in a registered plan you don’t need to include anything in your income when the income and gains stay inside the plan.

[Text reads: Income and gains held in a registered plan don’t need to be included in your income while in the plan]

For a TFSA, assuming you follow the rules, you do not need to include those amounts in your income ever. For an RRSP and a RRIF, you will need to include everything in your income when amounts come out of those plans.

[Text reads: For an RRSP and a RRIF, you will need to include everything in your income when amounts come out of those plans]

You can read all about this in our report called A Portfolio Less Taxing, Understanding the Taxation of Investment Income.

[Text reads: A Portfolio Less Taxing, Understanding the Taxation of Investment Income]

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