You must report any interest, capital gain, or dividend income you receive to the Canada Revenue Agency as investment income. However, there are exceptions, and understanding them and how to use them to your advantage can help you reduce your tax burden.
Taxable Interest and Investment Income
It is taxable to earn interest on a bank account, a term deposit, a guaranteed investment certificate, or a similar type of investment.
Similarly, interest on Canada savings bonds, treasury bills, life insurance policies, and foreign interest are all taxed. Lastly, if you received interest on a tax refund from the CRA, you must report it as income as well.
- If you receive over $50 of taxable interest or other investment income, you will receive a T5, Statement of Investment Income tax slip. You still have to report earned interests below $50 even if you did not receive a T-slip for them.
- If you earned interest from a trust, you will receive a T3, Statement of Trust Income Allocations and Designations tax slip. You may also receive interest income reported in T5013, Statement of Partnership Income.
- If you receive interest income from an employee profit-sharing plan, it will be reported on a T4PS slip. Also, the T5008, Statement of Securities Transactions slip can report interests earned on securities and bonds.
Foreign interests and dividends are taxed together, just like regular interest income. Foreign dividends are not eligible for the federal dividend tax credit for this reason.
Capital Gains
You must report the income you receive from the sale of shares and mutual fund units, just like the majority of interest and dividends.
In essence, you must report capital gains if you sell any of these investments and end up making money from the sale. Depending on the type of investment or whether you immediately reinvested the money, you might be able to defer your capital gains or qualify for an exemption in some circumstances. However, capital gains from shares and mutual funds are typically regarded as taxable income.
Canadian Dividends
You must report the gross-up amount and claim a federal dividends tax credit if you receive dividends from shares of Canadian corporations.
Dividends are reported on many slips as eligible or other than eligible dividends, just like other types of investment income. The taxable amount and the credit you are eligible for depend on the type of dividends.
Interest from Registered Retirement Savings Plan
Both the contributions you make and the interest you earn from an RRSP are not taxed. Nevertheless, the withdrawals you make from your RRSP are treated as taxable income.
Tax-Free Savings Accounts
Interest earned or dividends received from a Tax-Free Savings Account are not taxed. In fact, there is no tax due when you withdraw the money.
However, over the past few years, the CRA has paid close attention to investors who are accumulating substantial amounts in their TFSAs—six figures or more. Despite the fact that the money is supposed to be tax-free, the CRA has started to argue that it actually amounts to employment income if the account holders are spending a lot of time trading to increase their income.
Investments in Your Child’s Names
Depending on the type of investment and the child’s age, investments you make in their name are handled differently.
Children under 18 years old
The money you deposit into a child’s name investment account that pays interest or dividends will be credited back to you. This will be considered income for tax purposes.
Your child must report the amount in their tax return if the investment generates capital gain income because it is regarded as their income.
The Canada Child Benefit, which was intended for your child, will be regarded as income if you invest it in any kind of investment.
Children 18 years old or older
These investments are regarded as the child’s income once they turn 18 years old.
Filing Your Income Tax Return
Different types of investments are reported differently in your income tax return:
- Report interest, foreign interest, and foreign dividends on line 12100
- Report Canadian dividends taxable income on line 12000
- Report capital gain income on line 12700. However, for the capital gain income, you will have to complete schedule 3 as well.
You can calculate your investment income using the federal worksheet, and it will also show you where to file your reports.
