With tax season back in full swing, here’s a refresher on common types of investment income and how each is taxed. This overview focuses on investments held in non-registered accounts. Keep in mind that the type of account where investments are held can also impact tax obligations. While this article doesn’t address investment location, we are here to provide perspectives.
Interest Income — Income earned from interest-producing bank accounts and fixed-income investments, such as GICs, government Treasury bills, bonds and fixed-income mutual funds/ETFs is taxed as ordinary income. It is fully taxable at your marginal rate, making it one of the least tax-efficient types of investment income. Generally, interest income is taxable in the year it is earned and must be reported on a tax return, regardless of whether it has been received.
Dividends From Canadian Corporations — Canadian dividends are designated as either “eligible” or “non-eligible” and are included in income at a grossed-up rate. However, they qualify for the dividend tax credit, which reduces the taxes you pay. Eligible dividends—typically received from larger publicly-traded Canadian corporations—qualify for an enhanced tax credit. Non-eligible dividends are typically received from Canadian private corporations—small businesses that pay corporate tax at a lesser rate. In general, Canadian dividend income receives preferential tax treatment compared to interest income. That said, since the grossed-up amount is reported on your tax return, it can potentially impact income-tested government benefits, like Old Age Security.
Dividends From Foreign Corporations — Dividends from non-Canadian corporations are fully taxable at your marginal rate and do not qualify for a dividend tax credit. Additionally, they may be subject to foreign withholding taxes at source. A foreign tax credit may be available to reduce the taxes payable.
Capital Gains — When a capital asset, such as company shares, is sold for more than its adjusted cost base (ACB—generally its cost plus any expenses to acquire it), the profit is considered a capital gain when realized. Since 2000, one-half of a capital gain has been included in computing a taxpayer’s income. The proposal to increase the inclusion rate has been deferred until January 1, 2026 (page 2).
Mutual Funds & ETFs —There are additional considerations for mutual funds and ETFs. In general, when held in a non-registered account, two situations require you to report information on an annual tax return: i) when a fund makes a distribution, and ii) when you dispose of some or all of your fund holdings.
Distributions — A distribution represents the earnings being passed to the investor/unitholder. Distributions are taxed based on type (i.e., dividends, interest, capital gains) and are taxable whether you receive the distribution in cash or reinvest it in additional units. The amount of the reinvested distribution is also added to the ACB of your investment.
Return of Capital (ROC) — A return of capital may be reported as a distribution and represents a return of your original investment. This generally occurs when the amount distributed exceeds the fund’s earnings (income, dividends and capital gains). A ROC is not considered income and is non-taxable, but generally reduces the ACB, as long as the ACB is positive.
It’s important to keep records of changes to the fund’s ACB as a result of reinvested distributions and ROC. When the fund is eventually sold, this must be reported on a tax return and any capital gain/loss resulting from the disposition will be based on the ACB.
Reminder: You should have received most investment-related tax slips by the end of February. However, T3 and T5013 slips do not have to be sent before the end of March. Please call your wealth advisor at Precision Wealth Management if you have questions. For any investment questions, your wealth advisor can put you in touch with a Q Wealth portfolio manager..
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