How Investments Are Taxed in Canada: Taxable Accounts Guide

Learn how investments are taxed in Canada, including capital gains, interest, dividends, and how taxable accounts compare to registered ones.

INVESTING FOR BEGINNERS

4/26/202517 min read

Introduction

In the book Beat the Bank by Larry Bates he identifies the three “Wealth Killers” in investing as fees, inflation, and taxes. Each of these factors eat away at the gains investors make over time. The best way to maximize your returns in his opinion is to minimize fees, and taxes while outpacing the negative impacts of inflation.

Taxes can take a significant chunk of your investment returns if you fail to plan for them. In Canada, there are multiple ways your investments can be taxed depending on the type of account you hold them in and the type of investment you own.

In today’s post we are going to explore the topic of taxation when it comes to investing, and what you should understand to maximize your returns.

Registered or Tax Advantaged Accounts

In previous posts we have done a deep dive in to various different Registered Accounts. As a refresher a registered account is an investment account that was created with the intention of providing a tax-shelter for the end user (ie. me or you). These accounts were created for specific purposes:

  • TFSA- Multipurpose Savings Vehicle (ie. Retirement, Home Purchase, Other Large Purchase)

  • RRSP- Retirement

  • FHSA- First Time Home Purchase

  • RDSP- Saving For An Individual With A Disability

  • RESP- Saving For A Child’s Education

In all of the accounts any income earned whether it be dividends, distributions, interest, or capital gains will not be subjected to tax in the year it is earned. However, they each differ in when the taxation occurs:

  • The RRSP is taxed upon withdrawal. This is based on the assumption you will have a lower taxable income in retirement then during your working years.

  • Meanwhile, with the TFSA the contributions are made with after tax dollars. No tax will ever be applied to any investment growth both during the holding period and after withdrawing from the account.


Although they may differ in when the taxation occurs the intention of these accounts are always to minimize the overall tax burden, and to help the individual save for the intended purpose.

Taxable Accounts: How They Differ from Registered Accounts and Affect Your Investments

A taxable account on the other hand is an investment account whereby you will be subjected to tax on any income earned, in the year it is earned. These accounts are also sometimes referred to as cash accounts, or margin accounts. Because of the tax implications of these accounts they are generally only used by investors that have maximized their registered accounts, and/or need more flexibility for investment decisions (ie. day trading, option trading, etc).

Unlike registered accounts there is no tax-sheltered advantage to investing in a taxable account. How the income is taxed though depends on how it is earned (ie. in the form of interest, dividends, distributions, or capital gains).

A rule of thumb is the following:

  1. Canadian Eligible Dividends (Lowest Tax)

  2. Capital Gains

  3. Canadian Ineligible Dividends

  4. US & International Dividends

  5. Interest (Highest Tax)

How are Interest Taxed in a Non-Registered Account?

Interest is one of the simplest forms of investment income to understand. It is earned from assets like GIC’s, Bonds, or High Interest Savings Accounts (HISA’s). In a taxable account, all interest earned is taxed as income at your marginal tax rate. When you earn interest, your financial institution will send you a T5 Statement, which you must report on your tax return.

Ex. John lives in Ontario and earns $80,000 in 2024 as a plumber. He holds GIC’s in his taxable account that earned $10,000 in interest income. The following is a breakdown of how the interest income would be taxed:

  • Interest Income: $10,000

  • Marginal Tax Rate: 29.65% (Based on Income of $80,000)

  • Tax Owed: $2,965

  • Net Income After Tax: $7,035

In this example, the tax man takes $2,965, and John is left with $7,035 after taxes.

Timing of Taxation for Interest on GICs?

There is one caveat with regards to GIC’s. Generally with longer term GICs (ie. 3 years, 5 years, 10 years) the interest income is earned annually but automatically reinvested. Unfortunately, for tax purposes you have to claim the interest income in the year it is earned. This means that you pay taxes on profit that hasn’t even been realized.

For Example: Let’s Imagine John bought $10,000 of a 3-year non-refundable GIC earning 5% interest in January 2022. In this case:

  • $500 of interest income will need to be claimed on his 2022 tax return.

    • $10,000 x 0.05= $500

  • $525 of interest income will need to be claimed on his 2023 tax return.

    • $10,500 x 0.05 = $525

  • $551.25 of interest income will need to be claimed on his 2024 tax return.

    • $11,025 x 0.05= $551.25

  • At the end of 2024, he receives his principle (ie. $10,000), and all interest earned over the term (ie. $1,576.25)

How are Capital Gains Taxed in a Non-Registered Account?

On the other hand, Capital gains are income earned from the sale of an asset such as Stocks, ETF’s, Real Estate, etc. Unlike interest income, capital gains are only taxed when they are realized- meaning when you actually sell the asset and make a profit. In Canada, you are only taxed on 50% of the capital gains at your marginal tax rate.

Ex. Let’s imagine John who earned $80,000 in 2024 as a plumber, decided to sell some of his Canadian bank stocks in his taxable account. He realized a capital gain of $10,000. Here’s how the capital gain would be taxed.

  • Capital Gain: $10,000

  • Taxable Capital Gain (50%): $5,000

  • Marginal Tax Rate: 29.65%

  • Tax Owed: $1,482.50

  • Net Income After Tax: $8,517.50

In this example, John is taxed on only 50% of the $10,000 capital gain, which means only $5,000 is subject to tax. The tax owed is $1,482.50, and John is left with $8,517.50 after taxes. This demonstrates that capital gains are taxed preferentially compared to interest income in Canada.

How are Capital Losses Offset in a Non-Registered Account?

Unfortunately not all investments turn out to be successful. A capital loss occurs when you sell an asset for less than you paid for it. The good news is that capital losses can be used to offset capital gains, reduced the amount of tax you owe. In Canada, you can use capital losses to offset capital gain in the current year. If your losses exceed your gains, you can carry them back to previous tax years (up to three years), or carry them forward indefinitely to offset future capital gains.

Ex. Let’s use John again. In addition to the $10,000 in capital gains he realized from selling his bank stocks (see above), he also sold shares in a tech startup company at a loss of $4,000 in 2024. The following is how the capital loss would impact his tax situation:

  • Capital Gain: $10,000

  • Capital Loss: $4,000

  • Net Capital Gain (After offset): $6,000

  • Taxable Capital Gain (50%): $3,000

  • Marginal Tax Rate: 29.65%

  • Tax Owed: $889.50

  • Net Income After Tax: $9,110.50


In this example, John’s $4,000 capital loss is used to offset part of his $10,000 capital gain. This reduces his taxable gain from $10,000 down to $6,000. Therefore, it reduces the amount of tax he owns to $889.50, leaving him with $9,110.50 after taxes.

In the case that John had no capital gains to offset, he could carry the $4,000 loss forward to reduce taxes on future capital gains.

How are Dividends Taxed in a Non-Registered Account?

Although capital gains, and interest income are straightforward, dividend income is more complex.

Dividends are when a portion of company’s profits are paid out to their shareholders. They are generally paid out on a regular schedule (ie. annually or quarterly). Some companies offer high dividends, while others do not pay a dividend at all. Some investors choose to invest solely based on dividends. However, even if this isn’t your investment style it is important to understand both how they are taxed, and how that impacts your investment returns.

As we mentioned earlier the most tax-efficient dividends for Canadians are Canadian dividends. There are two types of Canadian Dividends: eligible and ineligible. Most individuals investing in publicly listed Canadian stocks will be receiving eligible dividends. To simplicity, we will focus on those for today.

Dividend Gross Up

Dividends are paid out of a corporations after-tax profits. This means that the company has already paid taxes on their earnings before distributing them to shareholders. The shareholder is then taxed on the dividends they earn. This creates a double taxation effect. In order to eliminate the double taxation effect the government has implemented a complex process of taxation in the hands of the shareholder.

Firstly, what happens is that the dividends are subjected to what is referred to as a “Dividend Gross Up” of 38%.

Ex. Using John again, remember he lives in Ontario, and earned $80,000 in 2024. At this income his combined marginal tax rate is 29.65%. He received $10,000 in dividends from a Canadian publicly listed company. Here’s the breakdown of the impact of the Dividend Gross Up.

  • Canadian Eligible Dividends: $10,000

  • Dividend Gross Up: 38%

  • Dividends after Gross Up: $13,800

After the gross up Canadian Dividends appear very unfavourable. However, the rationale is very simple. By adding back the gross up it adjusts the amount to what the corporation theoretically would have paid their shareholders before factoring in corporate taxes. However, as we stated earlier Canadian dividends are the most tax advantageous form of investment income. The reason for this is the Dividend Tax Credit.

Dividend Tax Credit

The Canadian Dividend Tax Credit serves two major purposes:

  1. Eliminate double taxation effect (ie. Corporate and Personal Income Tax)

  2. Encourage investment in Canadian Businesses.


Their are two portions to the dividend tax credit: Federal and Provincial. The federal dividend tax credit on eligible dividends in Canada is 15.02% of the grossed up amount. On top of that each province also has their own provincial tax credit rate (ex. Ontario is 10%).

Ex. Let’s apply these credits to John’s situation.

  • Dividends after Gross Up: $13,800

  • Federal Dividend Tax Credit (15.02%): $2,072.76

  • Provincial Dividend Tax Credit (10%): $1, 380


However, these credits are only applied after the grossed- up dividends are taxed at your marginal tax rate.

  • Dividends after Gross Up: $13,800

  • Marginal Tax Rate: 29.65%

  • Net Tax before Tax Credits: $4,091.70

  • Federal Dividend Tax Credit: $2,072.76

  • Provincial Dividend Tax Credit: $1,380

  • Net Tax: $638.94


In this example John made $10,000 in dividends from a Canadian stock but only paid $638.94 to the tax man. This tax advantage is why many Canadians prefer high dividend paying Canadian stocks like the big banks or utilities.

Special Situations

US & International Dividends

Although there is a significant benefit to receiving dividends from Canadian stocks the same advantages don’t exist for US, and International companies. The dividends from companies outside of Canada will not be subjected to the “gross up” but at the same time you will not receive the Canadian Dividend Tax Credit.

Instead 100% of US & International Dividends are taxed at your marginal tax rate. Additionally, they will be subjected to US, or Foreign withholding taxes at source (ie. when the payout occurs). For US Dividends the withholding tax is 15%. However, the withholding tax on international dividends varies from country to country.

There is what is referred to as the Foreign Tax Credit which will enable you to recoup the withholding tax paid on dividends from countries that have a tax treaty with Canada. This is meant to avoid Canadians having to pay a secondary layer of taxation. However, even with this in consideration US & International Dividends are taxed like interest income.

REITS

Although REIT distributions may resemble dividends, they often contain a mix of income types: capital gains, dividends, and return of capital. This complexity can make taxation challenging. This is why it is generally suggested that REITs are held in tax-sheltered account. It is highly recommended you work with a tax professional or accountant if you decide to hold them in a taxable account.

ETF’s

ETFs can generate different income types, such as interest, dividends, foreign income, and capital gains. The taxation of each follows the same rules as if you directly owned the underlying assets.

Conclusion

In our example, the most favorable income type was Canadian dividends, followed by capital gains, with interest being the least favorable. This hierarchy remains consistent in Ontario until an individual's income reaches $114,750, at which point capital gains may become more tax-advantageous. This may change depending on your province and that is why it is recommended that you work with a tax professional in order to optimize your returns using taxable accounts.

If you liked this post you may also like:

  • [Why the TFSA Is the Best Registered Account in Canada (2025)]

  • [FHSA Canada Guide: How It Works for First-Time Home Buyers]

  • [RRSP Guide 2025: Canada's Powerful Retirement Savings Tool]

Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

Citations

Introduction

In the book Beat the Bank by Larry Bates he identifies the three “Wealth Killers” in investing as fees, inflation, and taxes. Each of these factors eat away at the gains investors make over time. The best way to maximize your returns in his opinion is to minimize fees, and taxes while outpacing the negative impacts of inflation.

Taxes can take a significant chunk of your investment returns if you fail to plan for them. In Canada, there are multiple ways your investments can be taxed depending on the type of account you hold them in and the type of investment you own.

In today’s post we are going to explore the topic of taxation when it comes to investing, and what you should understand to maximize your returns.

Registered or Tax Advantaged Accounts

In previous posts we have done a deep dive in to various different Registered Accounts. As a refresher a registered account is an investment account that was created with the intention of providing a tax-shelter for the end user (ie. me or you). These accounts were created for specific purposes:

  • TFSA- Multipurpose Savings Vehicle (ie. Retirement, Home Purchase, Other Large Purchase)

  • RRSP- Retirement

  • FHSA- First Time Home Purchase

  • RDSP- Saving For An Individual With A Disability

  • RESP- Saving For A Child’s Education

In all of the accounts any income earned whether it be dividends, distributions, interest, or capital gains will not be subjected to tax in the year it is earned. However, they each differ in when the taxation occurs:

  • The RRSP is taxed upon withdrawal. This is based on the assumption you will have a lower taxable income in retirement then during your working years.

  • Meanwhile, with the TFSA the contributions are made with after tax dollars. No tax will ever be applied to any investment growth both during the holding period and after withdrawing from the account.


Although they may differ in when the taxation occurs the intention of these accounts are always to minimize the overall tax burden, and to help the individual save for the intended purpose.

Taxable Accounts: How They Differ from Registered Accounts and Affect Your Investments

A taxable account on the other hand is an investment account whereby you will be subjected to tax on any income earned, in the year it is earned. These accounts are also sometimes referred to as cash accounts, or margin accounts. Because of the tax implications of these accounts they are generally only used by investors that have maximized their registered accounts, and/or need more flexibility for investment decisions (ie. day trading, option trading, etc).

Unlike registered accounts there is no tax-sheltered advantage to investing in a taxable account. How the income is taxed though depends on how it is earned (ie. in the form of interest, dividends, distributions, or capital gains).

A rule of thumb is the following:

  1. Canadian Eligible Dividends (Lowest Tax)

  2. Capital Gains

  3. Canadian Ineligible Dividends

  4. US & International Dividends

  5. Interest (Highest Tax)

How are Interest Taxed in a Non-Registered Account?

Interest is one of the simplest forms of investment income to understand. It is earned from assets like GIC’s, Bonds, or High Interest Savings Accounts (HISA’s). In a taxable account, all interest earned is taxed as income at your marginal tax rate. When you earn interest, your financial institution will send you a T5 Statement, which you must report on your tax return.

Ex. John lives in Ontario and earns $80,000 in 2024 as a plumber. He holds GIC’s in his taxable account that earned $10,000 in interest income. The following is a breakdown of how the interest income would be taxed:

  • Interest Income: $10,000

  • Marginal Tax Rate: 29.65% (Based on Income of $80,000)

  • Tax Owed: $2,965

  • Net Income After Tax: $7,035

In this example, the tax man takes $2,965, and John is left with $7,035 after taxes.

Timing of Taxation for Interest on GICs?

There is one caveat with regards to GIC’s. Generally with longer term GICs (ie. 3 years, 5 years, 10 years) the interest income is earned annually but automatically reinvested. Unfortunately, for tax purposes you have to claim the interest income in the year it is earned. This means that you pay taxes on profit that hasn’t even been realized.

For Example: Let’s Imagine John bought $10,000 of a 3-year non-refundable GIC earning 5% interest in January 2022. In this case:

  • $500 of interest income will need to be claimed on his 2022 tax return.

    • $10,000 x 0.05= $500

  • $525 of interest income will need to be claimed on his 2023 tax return.

    • $10,500 x 0.05 = $525

  • $551.25 of interest income will need to be claimed on his 2024 tax return.

    • $11,025 x 0.05= $551.25

  • At the end of 2024, he receives his principle (ie. $10,000), and all interest earned over the term (ie. $1,576.25)

How are Capital Gains Taxed in a Non-Registered Account?

On the other hand, Capital gains are income earned from the sale of an asset such as Stocks, ETF’s, Real Estate, etc. Unlike interest income, capital gains are only taxed when they are realized- meaning when you actually sell the asset and make a profit. In Canada, you are only taxed on 50% of the capital gains at your marginal tax rate.

Ex. Let’s imagine John who earned $80,000 in 2024 as a plumber, decided to sell some of his Canadian bank stocks in his taxable account. He realized a capital gain of $10,000. Here’s how the capital gain would be taxed.

  • Capital Gain: $10,000

  • Taxable Capital Gain (50%): $5,000

  • Marginal Tax Rate: 29.65%

  • Tax Owed: $1,482.50

  • Net Income After Tax: $8,517.50

In this example, John is taxed on only 50% of the $10,000 capital gain, which means only $5,000 is subject to tax. The tax owed is $1,482.50, and John is left with $8,517.50 after taxes. This demonstrates that capital gains are taxed preferentially compared to interest income in Canada.

How are Capital Losses Offset in a Non-Registered Account?

Unfortunately not all investments turn out to be successful. A capital loss occurs when you sell an asset for less than you paid for it. The good news is that capital losses can be used to offset capital gains, reduced the amount of tax you owe. In Canada, you can use capital losses to offset capital gain in the current year. If your losses exceed your gains, you can carry them back to previous tax years (up to three years), or carry them forward indefinitely to offset future capital gains.

Ex. Let’s use John again. In addition to the $10,000 in capital gains he realized from selling his bank stocks (see above), he also sold shares in a tech startup company at a loss of $4,000 in 2024. The following is how the capital loss would impact his tax situation:

  • Capital Gain: $10,000

  • Capital Loss: $4,000

  • Net Capital Gain (After offset): $6,000

  • Taxable Capital Gain (50%): $3,000

  • Marginal Tax Rate: 29.65%

  • Tax Owed: $889.50

  • Net Income After Tax: $9,110.50


In this example, John’s $4,000 capital loss is used to offset part of his $10,000 capital gain. This reduces his taxable gain from $10,000 down to $6,000. Therefore, it reduces the amount of tax he owns to $889.50, leaving him with $9,110.50 after taxes.

In the case that John had no capital gains to offset, he could carry the $4,000 loss forward to reduce taxes on future capital gains.

How are Dividends Taxed in a Non-Registered Account?

Although capital gains, and interest income are straightforward, dividend income is more complex.

Dividends are when a portion of company’s profits are paid out to their shareholders. They are generally paid out on a regular schedule (ie. annually or quarterly). Some companies offer high dividends, while others do not pay a dividend at all. Some investors choose to invest solely based on dividends. However, even if this isn’t your investment style it is important to understand both how they are taxed, and how that impacts your investment returns.

As we mentioned earlier the most tax-efficient dividends for Canadians are Canadian dividends. There are two types of Canadian Dividends: eligible and ineligible. Most individuals investing in publicly listed Canadian stocks will be receiving eligible dividends. To simplicity, we will focus on those for today.

Dividend Gross Up

Dividends are paid out of a corporations after-tax profits. This means that the company has already paid taxes on their earnings before distributing them to shareholders. The shareholder is then taxed on the dividends they earn. This creates a double taxation effect. In order to eliminate the double taxation effect the government has implemented a complex process of taxation in the hands of the shareholder.

Firstly, what happens is that the dividends are subjected to what is referred to as a “Dividend Gross Up” of 38%.

Ex. Using John again, remember he lives in Ontario, and earned $80,000 in 2024. At this income his combined marginal tax rate is 29.65%. He received $10,000 in dividends from a Canadian publicly listed company. Here’s the breakdown of the impact of the Dividend Gross Up.

  • Canadian Eligible Dividends: $10,000

  • Dividend Gross Up: 38%

  • Dividends after Gross Up: $13,800

After the gross up Canadian Dividends appear very unfavourable. However, the rationale is very simple. By adding back the gross up it adjusts the amount to what the corporation theoretically would have paid their shareholders before factoring in corporate taxes. However, as we stated earlier Canadian dividends are the most tax advantageous form of investment income. The reason for this is the Dividend Tax Credit.

Dividend Tax Credit

The Canadian Dividend Tax Credit serves two major purposes:

  1. Eliminate double taxation effect (ie. Corporate and Personal Income Tax)

  2. Encourage investment in Canadian Businesses.


Their are two portions to the dividend tax credit: Federal and Provincial. The federal dividend tax credit on eligible dividends in Canada is 15.02% of the grossed up amount. On top of that each province also has their own provincial tax credit rate (ex. Ontario is 10%).

Ex. Let’s apply these credits to John’s situation.

  • Dividends after Gross Up: $13,800

  • Federal Dividend Tax Credit (15.02%): $2,072.76

  • Provincial Dividend Tax Credit (10%): $1, 380


However, these credits are only applied after the grossed- up dividends are taxed at your marginal tax rate.

  • Dividends after Gross Up: $13,800

  • Marginal Tax Rate: 29.65%

  • Net Tax before Tax Credits: $4,091.70

  • Federal Dividend Tax Credit: $2,072.76

  • Provincial Dividend Tax Credit: $1,380

  • Net Tax: $638.94


In this example John made $10,000 in dividends from a Canadian stock but only paid $638.94 to the tax man. This tax advantage is why many Canadians prefer high dividend paying Canadian stocks like the big banks or utilities.

Special Situations

US & International Dividends

Although there is a significant benefit to receiving dividends from Canadian stocks the same advantages don’t exist for US, and International companies. The dividends from companies outside of Canada will not be subjected to the “gross up” but at the same time you will not receive the Canadian Dividend Tax Credit.

Instead 100% of US & International Dividends are taxed at your marginal tax rate. Additionally, they will be subjected to US, or Foreign withholding taxes at source (ie. when the payout occurs). For US Dividends the withholding tax is 15%. However, the withholding tax on international dividends varies from country to country.

There is what is referred to as the Foreign Tax Credit which will enable you to recoup the withholding tax paid on dividends from countries that have a tax treaty with Canada. This is meant to avoid Canadians having to pay a secondary layer of taxation. However, even with this in consideration US & International Dividends are taxed like interest income.

REITS

Although REIT distributions may resemble dividends, they often contain a mix of income types: capital gains, dividends, and return of capital. This complexity can make taxation challenging. This is why it is generally suggested that REITs are held in tax-sheltered account. It is highly recommended you work with a tax professional or accountant if you decide to hold them in a taxable account.

ETF’s

ETFs can generate different income types, such as interest, dividends, foreign income, and capital gains. The taxation of each follows the same rules as if you directly owned the underlying assets.

Conclusion

In our example, the most favorable income type was Canadian dividends, followed by capital gains, with interest being the least favorable. This hierarchy remains consistent in Ontario until an individual's income reaches $114,750, at which point capital gains may become more tax-advantageous. This may change depending on your province and that is why it is recommended that you work with a tax professional in order to optimize your returns using taxable accounts.

If you liked this post you may also like:

  • [Why the TFSA Is the Best Registered Account in Canada (2025)]

  • [FHSA Canada Guide: How It Works for First-Time Home Buyers]

  • [RRSP Guide 2025: Canada's Powerful Retirement Savings Tool]

Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

Citations

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