Every spring, as Canadians file their taxes and returns, or when balances owing are issued, many people take a closer look at where their money is going. That’s when familiar questions pop up: Why do I owe tax on some investments and not others? Why does investment income show up differently from employment income?
The short answer is: your income, your investment choices and the taxes you owe are interconnected —and understanding how they all influence your financial position can help you make more informed decisions. Tax season is a perfect time to step back and see how your investments fit into your overall taxable income before you make your next move.
How different investments and accounts are taxed in Canada
A helpful place to start is by understanding the types of income your investments can generate. The Canada Revenue Agency (CRA) classifies three common types of investment income: interest, dividends, and capital gains, and each are taxed differently.
How investment income is taxed depends on two things: the type of income and the type of account that holds the investment. Understanding these two factors can help you see how much tax you’ll need to pay.
1) Types of Investment Income:
- Interest income: Income earned from investments such as guaranteed investment certificates (GICs), bonds and some investment funds is generally taxed in the year it is earned. For example, if you earn $200 in interest from a GIC in a non-registered account this year, that $200 is usually added to your taxable income for the year, even if you don’t withdraw the money.
- Dividend income: Dividends are payments companies make to shareholders. The payments come from company profits. Dividends from Canadian companies receive a dividend tax credit, which usually means you pay less tax on them than on interest income. Dividends from foreign companies are generally taxed as regular income and don’t receive the dividend tax credit. For example, if you receive $300 in dividends from a Canadian company, you’ll typically owe less tax than you would on $300 of interest or $300 in foreign company dividends.
- Capital gains: When an investment is sold for more than its purchase price, the profit is considered a capital gain. Only a portion of that gain is included in taxable income. For example, if you buy a stock for $100 and later sell it for $150, the $50 profit is a capital gain. Only a portion of that $50 is taxable, not the full amount.
2) Types of investment accounts:
- Tax‑Free Savings Account (TFSA):Investment growth and withdrawals in a TFSA are generally not taxed and you don’t need to reference them in your tax return.
- Registered Retirement Savings Plan (RRSP): Investments held in an RRSP generally defer tax until money is withdrawn. Contributions may reduce taxable income today, and withdrawals are typically taxed as income later.
- First Home Savings Account (FHSA): An FHSA offers tax advantages while you save for your first home. Typically, qualifying withdrawals for a first-home purchase are tax-free.
- Non-registered (taxable) accounts: These accounts don’t come with tax shelters. Investment income earned outside registered accounts is generally reported and taxed annually, including interest, dividends and realized capital gains.
Because different investments and accounts are taxed at different times, the tax impact isn’t always immediate. For example, interest in a non-registered account is typically reported and taxed annually, while investment gains in registered accounts may not appear on your return until money is withdrawn.
What to consider before you invest
Before you put new money into any investment — especially during tax season — consider these three practical questions:
How will this investment be taxed and when?
Think about what type of income the investment is expected to generate and whether tax applies each year or only when you sell or withdraw. Product pages, fund fact sheets, or an advisor can often help clarify this.
Which account will you use, and do you have the contribution room?
Contribution room is simply the maximum amount you’re allowed to put into a registered account without penalties, based on the rules for that account.
- TFSA: Room accumulates each year you’re eligible and carries forward even if you didn’t contribute in past years. Withdrawals create new room in the following calendar year. Over‑contributions can trigger penalties, so it’s worth checking your available room before you add money. You can check by visiting your CRA My Account.
- RRSP: Your room is generally tied to your earned income and reported on your CRA Notice of Assessment. Any carry-forward contribution room is also reported on your Notice of Assessment. Contributions reduce the room you have and withdrawals are typically taxable later.
- FHSA: You can contribute up to $8,000 per year, to a lifetime maximum of $40,000. Additionally, up to $8,000 of unused annual room can be carried forward.
What information will you receive in advance of tax time and in what form?
Depending on what you hold and where, you may receive tax slips such as T5s, T3s, T5008s, or contribution receipts for registered accounts. Most investment firms make these available through online account portals ahead of tax filing deadlines.
Bringing it together
Tax season often brings investment decisions into sharper focus, whether through a refund, a balance owing, or a stack of slips that highlight how different sources of income are treated. Rather than viewing this as a once-a-year administrative task, it can be a useful moment to step back and assess whether current investments still align with personal goals, time horizon, and comfort with risk.
Investment choices don’t exist in isolation. Tax treatment ultimately determines how much you keep, not just what you earn. Taking the time to understand how investing and taxes impact your financial position before you invest can lead to more informed decisions and fewer surprises at tax time, now or in the future. Before you invest, take a moment to CheckFirst.
