How Investment Income Is Taxed in Canada
How interest, dividends, capital gains and return of capital are each taxed, and what a TFSA or RRSP changes about the answer.
You bought something last year. Maybe a few shares, an ETF inside a self-directed account, or a GIC that finally came due. Now it's tax season, a slip's turned up in the mail, and you're not sure what the CRA already knows or what you're meant to do about it.
Investment income gets taxed in several different ways, and which way applies depends on two things: the kind of income it is, and the account it was sitting in.
You almost certainly haven't done anything wrong. There was no form to file when you bought the investment, and no tax was due along the way. Investment tax is calculated once a year, after the fact. If you already sold something, nothing was owed at the moment of the sale either.
Key takeaways
- Interest is taxed like your paycheque. Capital gains are taxed at half that rate, and eligible Canadian dividends lighter still.
- Nothing inside a TFSA is ever taxed. An RRSP only delays the tax, and every dollar you withdraw later counts as ordinary income.
- A holding that has gone up costs you nothing until the day you sell it.
- Nothing is withheld from investment income through the year, so the whole bill arrives at once when you file.
What are the four kinds of investment income?
Your money can earn four different kinds of income, and the CRA treats each differently.
Interest is what a savings account, a GIC or a bond pays you for lending out your money. It's taxed the same way your paycheque is, so every dollar counts as income at your full rate with no break attached to any of it.
A dividend is a portion of a company's profit, paid out to the people who own the shares. Dividends from Canadian companies get treatment that reduces the tax on them, and dividends from anywhere else don't.
Capital gains come from selling. If you sell a position above your original cost, that profit is a capital gain, and only half of it is taxable, which makes it the lowest-taxed of the four.3
Return of capital is the odd one, and it shouldn't be confused with income. It's part of your original investment being handed back to you, which commonly happens with REITs and with certain ETFs and mutual funds. None of it is taxable when it arrives. It catches up with you when you sell, for reasons the cost base section below explains.
Does any of this apply if it's in a TFSA or RRSP?
If everything you hold sits inside a TFSA, none of it does. A TFSA pays no tax on the interest, dividends or gains it earns, and nothing becomes taxable when you take the money out.
An RRSP is a little different. It doesn't remove the tax so much as delay it. Nothing's taxed while the money stays inside, but every dollar you eventually withdraw counts as ordinary income, including amounts that would've been a capital gain or a Canadian dividend in an ordinary account.
A First Home Savings Account behaves like a TFSA while the money's in it. Everything from here on is about a regular taxable account, commonly referred to as a non-registered or cash account.
Why your dividend slip shows more than you got paid
A Canadian company pays you a dividend, and the number on your slip is larger than the money that arrived in your account. That's correct. The CRA inflates the dividend by 38% before it goes on your return, and the inflated figure is called the grossed-up amount.2
Then part of it comes back. The dividend tax credit reduces the tax you owe. This is because the company already paid corporate tax on those earnings before paying you. The gross-up restores the dividend to roughly what it was before that corporate tax, and the credit returns the portion the company already covered.
Not every dividend carries the same size credit. Dividends from large public Canadian companies are called eligible, and they receive the larger gross-up and the larger credit. Dividends from small private companies are non-eligible, and they're grossed up by 15% instead, with a smaller credit to match.2
Because the grossed-up figure is what appears on your return, your reported income rises by more than you were actually paid. It will affect any benefit or credit calculated from your net income.
Do you owe anything if you haven't sold?
No. A holding that's doubled since you bought it costs you nothing in tax until the day you sell it. Any dividends it paid you along the way are taxed in the year you received them, but the growth itself isn't. The balance you see in your brokerage account has no bearing on your return.
The gain isn't real to the CRA until you sell, which is often referred to as realizing the gain. A year where your account climbed steeply can produce no tax bill at all, while a flat year where you sold one old holding can produce a sizeable one.
Funds are the exception. A mutual fund or ETF sells holdings inside itself through the year, and it distributes those gains to the people who own units. So a slip can show a capital gain in a year you never sold anything.
Giving an investment away or transferring it out of your name counts as a sale too, even though no money changed hands. The same applies if you move a position from a non-registered account into an RRSP or TFSA. The CRA treats it as sold at its market value that day, so you owe tax on the gain you'd made up to that point.10 The rule runs one way only: if the position has fallen instead, the loss is denied outright rather than saved for later.10
How much would you actually pay on a thousand dollars?
Let's take a thousand dollars, earned three different ways, by someone in Alberta whose taxable income sits between $61,201 and $117,045.1
Earned as interest, the entire thousand appears on your return at the full rate for that bracket, which is 30.50%, so the tax amounts to $305.
Earned as eligible Canadian dividends, the thousand is grossed up first and the credit then comes off, which brings the rate down to 10.16% and the tax down to $101.60.
Earned as a capital gain, only half the thousand is taxable, so the rate works out to 15.25% and the tax to $152.50.
| Item | Share kept | Notes |
|---|---|---|
| Interest | 69.5% kept | Savings accounts, GICs and bonds |
| Capital gains | 84.8% kept | Sold above what it cost you |
| Eligible Canadian dividends | 89.8% kept | Shares in large Canadian companies |
The order isn't fixed at every income level. For lower earners the dividend tax credit cancels the tax on Canadian dividends completely, and in Alberta an eligible dividend attracts no combined tax at all below $58,524 of taxable income. Climb high enough and the order flips, with eligible dividends taxed harder than capital gains from roughly $154,000 upward.1
| Category | Interest | Capital gains | Eligible dividends |
|---|---|---|---|
| $16k | 14% | 7% | 0% |
| $23k | 22% | 11% | 0% |
| $59k | 28.5% | 14.25% | 7.56% |
| $61k | 30.5% | 15.25% | 10.16% |
| $117k | 36% | 18% | 17.75% |
| $154k | 38% | 19% | 20.51% |
| $181k | 41.29% | 20.65% | 25.06% |
| $258k | 47% | 23.5% | 32.93% |
| $370k | 48% | 24% | 34.31% |
What's an adjusted cost base (ACB)?
When you sell, your gain isn't the sale price. It's the sale price minus what the holding cost you, and that cost figure is referred to as the adjusted cost base. It starts as the price you paid, with the buying commission added on top, and then several things change it.4
If you buy more of the same holding at a different price, the two get averaged together. You don't get to choose which shares you sold, because identical holdings are pooled into one blended cost.
Reinvested dividends are purchases. Every dividend that automatically bought more shares increased your cost base. If you ignore years of those, you'll report a bigger gain than you actually made, and pay tax on money that's already been taxed once. One investor did exactly that after a decade of reinvesting, took the book value straight off the brokerage statement, and handed the CRA tax on thousands of dollars of gain that had never existed.
Return of capital operates in reverse and reduces your base, which makes the eventual gain larger. If the base ever reaches zero, anything further becomes a capital gain straight away.
Your broker doesn't usually track any of this for you. The book value on a statement is an estimate, and it's frequently wrong after a transfer in from another institution that never knew what you originally paid. Keeping your own record of it matters at tax time.
US stocks don't get the dividend tax credit
The credit we've been describing only covers Canadian companies. A dividend from a US company, or from a fund holding US shares, is considered foreign income, and it's taxed at the same rate your salary is, exactly like interest.
The US takes a cut as well. A withholding tax of 15% comes off first, the rate the tax treaty sets for Canadian residents.6 You aren't taxed twice on it, because Canada allows a foreign tax credit for what was withheld, and claiming it on your return generally cancels the double-up.
One thing to think about is that the treaty exempts US dividends paid into an RRSP, so nothing's withheld there.6 A TFSA gets no exemption, and since a TFSA generates no Canadian tax, there's nothing for a foreign tax credit to offset.
Gains on US holdings can carry a currency effect as well. The gain is calculated in Canadian dollars, using the exchange rate the day you bought and the rate the day you sold. So a stock that went nowhere in US dollars can still produce a taxable gain here.
Losses can cancel out gains
A capital loss cancels a capital gain, dollar for dollar. Sell one holding at a loss and another at a gain in the same year, and only the difference gets taxed.
Losses go against capital gains and nothing else. They don't reduce your reported salary or interest income, so a year with a large loss and no gains doesn't reduce your bill at all.
Unused losses don't expire. You can carry one back against a capital gain you reported in any of the three previous years, or hold it until a future gain turns up, with no limit on how long you keep it.5
Selling and buying the same thing straight back doesn't produce a usable loss. If you or your spouse repurchase it within 30 days either side of the sale, the loss is denied and gets added to your cost base instead.4
Nobody took the tax off for you
Your employer takes tax off every paycheque before it reaches you. Nothing does that with investment income. The full amount is deposited into your account through the year, and what you owe on it comes due when you file.
That gap catches people out. One investor planned to use holdings from a non-registered account as an RRSP contribution, and moved the positions across in kind. Nobody had mentioned that the transfer counts as a sale, so the gain became taxable the day it moved, and the bill turned up months later with no withholding to soften it.
The slips arrive in late winter. Interest and dividends come on a T5, which has to reach you by the last day of February.7 Income from funds and trusts comes on a T3, due 90 days after the trust's year end, which for most funds means the end of March.8 A sale is reported on a T5008. T3s are the last to land, and filing before they show up is how you end up amending a return, which is nobody's idea of a good evening.
A T5008 shows what you sold for and usually not what you paid, so the cost base stays your responsibility to track.
If your tax owing passes $3,000 in a year, and passed it in one of the two previous years, the CRA stops waiting until spring and asks for quarterly instalments instead. In Quebec the figure is $1,800.9
Common questions
Do I pay tax on investments I haven't sold?
No. Growth isn't taxable until you sell and realize the gain. Dividends and interest are different, and are taxed in the year you receive them.
Do I have to report investments held in my TFSA?
No. A TFSA pays no tax on interest, dividends or capital gains, no slip is issued, and withdrawals are not taxable.
What if I don't know what I paid for a stock?
You still have to work it out, because the CRA taxes the gain above your adjusted cost base. Old statements, the transferring brokerage and your own records are the usual places to rebuild it from, and the book value your broker shows can be wrong.
Am I taxed twice on US dividends?
Generally no. The US withholds 15% before the money reaches you, and Canada gives a foreign tax credit for that amount on your return. The exception is a TFSA, where the withholding cannot be recovered.
Can a capital loss reduce the tax on my salary?
No. Capital losses only offset capital gains. If you have no gains this year, the loss can go back against gains from the past three years or forward indefinitely.
Sources
- EYCombined federal and provincial personal income tax rates, Alberta 2026. Table dated 15 June 2026. Supports the bracket, the marginal rates on interest, eligible dividends and capital gains, the zero-rate point and the crossover. Accessed 2026-08-23.
- CRALines 12000 and 12010, taxable amount of dividends from taxable Canadian corporations. Supports the 38% eligible gross-up and the 15% non-eligible gross-up. Accessed 2026-08-23.
- Department of Finance CanadaGovernment of Canada announces deferral in implementation of change to capital gains inclusion rate. The proposed two-thirds rate was later cancelled and the inclusion rate remains one-half. Accessed 2026-08-23.
- CRAGuide T4037, Capital Gains. Supports the adjusted cost base and the 30-day superficial loss rule. Accessed 2026-08-23.
- CRACapital losses and deductions. Supports the three-year carryback and the unlimited carryforward of a net capital loss. Accessed 2026-08-23.
- Department of Finance CanadaConvention between Canada and the United States of America with respect to taxes on income and on capital, consolidated to 2007. Article X sets the 15% dividend rate; Article XXI paragraph 2 exempts retirement plans. Accessed 2026-08-23.
- CRADistributing the T5 slips. Recipients must have their slips by the last day of February. Accessed 2026-08-23.
- CRAWhen to file a trust's T3 return. Due no later than 90 days after the trust's tax year end. Accessed 2026-08-23.
- CRARequired tax instalments for individuals. Supports the $3,000 threshold and the $1,800 Quebec figure. Accessed 2026-08-23.
- CRABefore you contribute to a TFSA. An in-kind contribution is a disposition at fair market value: the gain is reportable and a loss cannot be claimed. The same treatment applies to an in-kind RRSP contribution. Accessed 2026-08-23.
Educational, not financial advice. Figures verified against primary sources on the date shown.