Canada tax rate on investment income: What you need to know in 2025

Did you know that different types of investment income in Canada are taxed at significantly different rates? While interest income is taxed at up to 53.53% in Ontario, capital gains are effectively taxed at half that rate since only 50% is taxable.

Understanding how investment income tax rates work in Canada is crucial for maximizing your after-tax returns. For example, $1,000 of interest income yields only $740 after tax, compared to $848 for Canadian dividends and $870 for capital gains. This dramatic difference shows why knowing how investment income is taxed in Canada matters. We’ll walk you through the 2025 tax landscape for various investment types, including the federal tax rates that range from 15% for income under $57,375 to 33% for income over $253,414. Additionally, we’ll explain the proposed changes to capital gains taxation, where the inclusion rate for gains exceeding $250,000 will increase to two-thirds starting June 25, 2024.

Whether you’re earning interest from GICs, dividends from stocks, or profits from selling investments, this guide will help you navigate Canada’s complex investment taxation system for 2025.

What is considered investment income in Canada?

In Canada’s tax system, investment income falls into three main categories, each with distinct tax treatment. Understanding what counts as investment income and how it’s taxed can significantly impact your financial planning strategy.

What is considered investment income in Canada?

Investment income encompasses money earned from your investments rather than from employment or business activities. The Canada Revenue Agency (CRA) classifies investment income into several types, with the most common being interest, dividends, and capital gains. How much tax you pay depends not only on the amount earned but also on the specific type of investment income received.

Interest, dividends, capital gains explained

Interest Income: This represents earnings from lending your money, typically through savings accounts, Guaranteed Investment Certificates (GICs), bonds, treasury bills, or similar fixed-income investments. Interest income is fully taxable at your marginal tax rate, making it the least tax-efficient form of investment income. For instance, in Ontario, individuals in the highest tax bracket could pay as much as 53.53% on interest income.

Dividend Income: When companies distribute a portion of their profits to shareholders, these payments are called dividends. In Canada, dividends are categorized as either “eligible” or “non-eligible”:

• Eligible dividends come from income that has already been taxed at the general corporate tax rate
• Non-eligible dividends originate from income taxed at the lower small business rate

Both types benefit from the dividend tax credit, which makes them more tax-efficient than interest income. Consequently, the highest marginal tax rates in Ontario are approximately 39.34% for eligible dividends and 47.74% for non-eligible dividends.

Capital Gains: These occur when you sell an investment for more than you paid for it. As of June 25, 2024, the inclusion rate for individuals is 50% on the first $348,340.05 of capital gains and 66.67% on any amount exceeding this threshold. This means only half (or two-thirds for larger gains) of your profit is subject to tax, effectively making capital gains the most tax-efficient type of investment income. Using Ontario tax rates as reference, the highest rate of tax for capital gains is approximately 26.76%.

Foreign investment income deserves special attention. Unlike Canadian dividends, foreign dividends don’t qualify for the dividend tax credit and are taxed like regular income. Furthermore, many countries impose a withholding tax (typically 15%-25%) on dividends paid to non-residents.

Registered vs non-registered accounts

The taxation of investment income also depends on whether your investments are held in registered or non-registered accounts.

Registered Accounts: These are investment accounts given tax-deferred or tax-sheltered status by the government. Income earned within these accounts is either not taxed until withdrawal or, in some cases, not taxed at all. Common registered accounts include:

• Registered Retirement Savings Plan (RRSP)
• Tax-Free Savings Account (TFSA)
• Registered Education Savings Plan (RESP)
• Registered Retirement Income Fund (RRIF)
• First Home Savings Account (FHSA)

The primary advantage of registered accounts is their favorable tax treatment. For instance, with TFSAs and FHSAs, you don’t pay tax on withdrawals, allowing your investment income to grow completely tax-free (provided you meet all conditions for qualifying withdrawals in the case of FHSAs).

Non-Registered Accounts: These investment accounts don’t receive any special tax treatment. All investment income generated must be reported and taxed annually according to the specific rules for each type of income. However, non-registered accounts offer certain advantages:

• No contribution limits
• Ability to own assets not permitted in registered accounts (like cryptocurrencies, real estate, and collectibles)
• Access to tax-loss harvesting strategies
• No tax on withdrawals of your original contributions

When investing in non-registered accounts, it’s important to understand how different investment incomes are taxed. Interest and foreign dividends are fully taxable at your marginal tax rate, Canadian dividends benefit from the dividend tax credit, and only 50% (or 66.67% for larger amounts) of capital gains are included in your taxable income.

Therefore, the location of your investments—whether in registered or non-registered accounts—should be part of your overall tax planning strategy to maximize after-tax returns.

How is interest income taxed in Canada?

Interest income takes the hardest tax hit among all investment income types in Canada. In sharp contrast to capital gains and dividends, every dollar of interest gets fully taxed at your marginal rate with no special credits or deductions to soften the blow. Let’s examine exactly how Canada taxes your interest earnings in 2025.

Interest income tax rate by province

Interest income represents the most heavily taxed form of investment income across all Canadian provinces. Every dollar earned through interest gets added directly to your annual income and taxed at your full marginal tax rate—making it substantially less tax-efficient than dividends or capital gains.

For high-income earners, this tax burden becomes particularly noticeable. In provinces with the highest tax rates, individuals in top tax brackets may surrender almost half of their interest income to taxes. Specifically, taxpayers with income sufficient to put them in the highest tax bracket (approximately $176,956.75 in 2008) paid tax on interest income at rates ranging from about 39% to 48%, depending on their province or territory of residence.

Moreover, taxpayers must report all interest received or earned regardless of the amount. While financial institutions issue T5 slips for interest payments of $69.67 or more, you’re still legally obligated to report smaller amounts even without receiving a formal slip.

Accrued vs received interest

First of all, it’s crucial to understand that Canadian tax law operates on both a received and accrued basis for interest income. This creates an important distinction that catches many investors off guard.

Generally speaking, you must report interest annually whether you’ve actually received the money or not. This becomes particularly relevant with:

• Long-term GICs (longer than 12 months)
• Compound interest bonds
• Investments where interest accumulates but isn’t paid until maturity

In these scenarios, you’ll pay tax on “notional” interest—interest that has been credited to your investment but not yet paid out. For example, if you purchase a three-year GIC paying 5% annually with all interest paid at maturity, you must still report and pay tax on the accrued 5% each year.

For investments made during the year, interest that accrued but wasn’t paid is typically reported in the taxation year when the anniversary date falls. If you invest on June 1, 2024, you’ll report interest accumulated until May 2025 on your 2025 tax return.

Tax on GICs and bonds

GICs held outside registered accounts receive no favorable tax treatment. The interest earned from a GIC gets taxed as regular income at your full marginal rate. Indeed, unlike capital gains where only 50% of profits are taxable, 100% of GIC interest income is fully taxable.

Notably, timing matters with GIC taxation. Even if paid all at once at maturity, interest is deemed earned in each year it accrues—meaning you’ll need to pay tax annually on the accumulating interest. This accrual taxation applies regardless of when you actually receive the interest payment.

For market-linked GICs, which tie returns to market performance, the return is still reported as interest income rather than capital gains—despite its connection to market movements. Any minimum guaranteed interest is reported annually, while additional market-based returns are reported in the final year of the GIC.

Bonds present additional complexities. When purchased at face value and held to maturity, there’s no capital gain or loss—just interest income. Conversely, buying bonds at a premium (above face value) creates a capital loss at maturity, while purchasing at a discount generates a capital gain. For instance, paying $15,326.96 for a $13,933.60 face value bond results in a $1,393.36 capital loss at maturity.

For foreign currency GICs, such as those denominated in US dollars, all interest must be reported in Canadian dollars—requiring currency conversion for tax reporting.

Given these complexities, many financial advisors suggest keeping interest-generating investments inside registered accounts like RRSPs or TFSAs whenever possible. This strategy eliminates the annual tax burden and simplifies your financial record-keeping substantially.

How are dividends taxed in Canada?

Canadian dividends offer a more favorable tax treatment than interest income. Yet, the taxation of dividends involves unique mechanisms designed to prevent double taxation. Let’s examine how Canada taxes dividend income in 2025.

Eligible vs non-eligible dividends

The Canadian tax system classifies dividends into two categories, each with distinct tax treatment:

Eligible dividends are paid from corporate income that has been taxed at the higher general corporate tax rate. These typically come from:

• Public corporations
• Private corporations that have paid tax at the general corporate rate
• Income that exceeds the small business deduction limit (currently $696,680.10 federally)

Non-eligible dividends (sometimes called “other than eligible dividends”) originate from income taxed at the lower small business rate. These usually come from:

• Canadian-controlled private corporations (CCPCs) claiming the small business deduction
• Income earned within the small business limit
• Passive investment income earned by small businesses

The distinction matters greatly for your tax bill. Eligible dividends receive more favorable tax treatment because the corporation has already paid a higher rate of corporate tax on these profits.

Dividend tax credit

To prevent double taxation (once at the corporate level and again at the personal level), Canada uses a system involving “gross-up” and “dividend tax credit”:

1. Gross-up: You first increase (gross-up) the actual dividend amount received:
   • Eligible dividends: grossed up by 38%
   • Non-eligible dividends: grossed up by 15%
2. Dividend tax credit: You then claim a tax credit against the grossed-up amount:
   • Federal credit for eligible dividends: 15.0198% of the taxable (grossed-up) amount
   • Federal credit for non-eligible dividends: 9.0301% of the taxable amount

This mechanism acknowledges taxes already paid by the corporation. The gross-up represents the approximate pre-tax corporate income, after which the dividend tax credit offsets corporate taxes already paid.

For example, if you receive $500 in eligible dividends, you would:

• Report $690 as income ($500 × 1.38)
• Claim a federal dividend tax credit of approximately $103.64 ($690 × 15.0198%)
• Also claim applicable provincial dividend tax credits

The result is that dividends—especially eligible dividends—are often taxed at lower effective rates than regular income.

Dividend tax rate by province

Tax rates on dividends vary substantially across provinces. In 2025, combined federal-provincial top marginal rates for dividends range as follows:

Importantly, these rates apply to taxpayers in the highest income brackets. Your actual rate may be lower depending on your total income.

Several provinces have enhanced their provincial dividend tax credits. For example, Ontario offers an additional 10% dividend tax credit for eligible dividends and 2.9863% for non-eligible dividends.

Remember that foreign dividends do not qualify for the dividend tax credit and are taxed as regular income. This makes Canadian dividends generally more tax-efficient than their foreign counterparts for Canadian residents.

Correct reporting is essential—reporting eligible dividends as non-eligible means forfeiting the higher dividend tax credit, increasing your tax burden. Conversely, incorrectly claiming eligible dividend treatment for non-eligible dividends could trigger CRA reassessment and penalties.

Dividend income must be reported on line 12000 of your tax return, with dividend tax credits claimed on line 40425. The amounts are typically shown on T5, T4PS, T3, or T5013 slips provided by the paying corporation or financial institution.

How does capital gains tax work in 2025?

Capital gains stand out as one of the most tax-advantaged forms of investment income in Canada. Following recent government decisions, the taxation landscape for capital gains in 2025 remains favorable for investors. Let’s explore the current rules, potential pitfalls, and strategies to optimize your tax position.

Capital gains inclusion rate

After political changes in 2025, the previously announced increase to the capital gains inclusion rate has been canceled. Essentially, you continue to pay tax on only 50% of any capital gains realized, maintaining the long-standing inclusion rate. This applies to all capital gains, regardless of amount or who earns them.

Here’s how the math works: If you purchase a cabin for $418,008 in 2015 and sell it for $696,680 in 2025, your capital gain equals $278,672. With the 50% inclusion rate, only $139,336 becomes taxable and gets added to your annual income.

The amount of tax you’ll ultimately pay depends on:

• Your total income and tax bracket
• Your province of residence
• Any available exemptions or credits

Certain assets remain exempt from capital gains tax altogether, including your principal residence and investments held in registered accounts like RRSPs and TFSAs.

Superficial loss rules

The Canada Revenue Agency (CRA) enforces “superficial loss” rules to prevent investors from artificially creating tax losses. A superficial loss occurs when you sell an investment at a loss but then you (or an affiliated person) repurchase the same or an identical property within a specific timeframe.

The CRA applies the superficial loss rule when all five of these conditions are met:

1. You realize a capital loss on a disposition
2. You or an affiliated person acquires the same or identical property
3. The acquisition occurs within 30 calendar days before or after the disposition
4. The same or identical property is still owned 30 days after the disposition
5. The acquisition was made by you or an affiliated person

Affiliated persons include your spouse/common-law partner, a corporation you control, and certain trusts or partnerships. Parents, grandparents, siblings, children, and grandchildren are not considered affiliated persons.

In cases where the superficial loss rules apply, your capital loss is either suspended (can be used later) or denied (lost forever). If the loss is suspended, it typically gets added to the adjusted cost base of the newly acquired property, effectively deferring the loss until the property is ultimately sold.

Capital gains deferral strategies

Although you must report capital gains in the year they’re realized, several strategies exist to defer or reduce your tax burden:

First, you can offset current gains with net capital losses from previous years. The CRA allows you to apply your net capital losses to taxable capital gains of the three preceding years or carry them forward indefinitely.

Second, you may claim a capital reserve in certain circumstances. This allows you to spread the recognition of a capital gain over multiple years, thus deferring part of the tax impact.

Third, for qualifying small business shares and farming/fishing property, the Lifetime Capital Gains Exemption (LCGE) offers significant tax relief. For 2025, this exemption stands at $1.74 million, sheltering substantial gains from taxation.

Finally, the government introduced a new Canadian Entrepreneurs’ Incentive (CEI) effective for the 2025 tax year. This reduces the inclusion rate to one-third on a lifetime maximum of eligible capital gains, starting with a limit that increases by $557,344 annually until reaching $2.79 million in 2029.

By understanding these rules and planning accordingly, you can significantly reduce your tax burden on investment profits while remaining compliant with CRA regulations.

Combined tax rates on investment income by province

Provincial tax rates vary significantly across Canada, creating a patchwork of investment income taxation that demands careful attention from investors. Understanding these differences can substantially impact your after-tax returns, especially for high-income earners.

2025 tax rate chart for interest, dividends, capital gains

The top marginal tax rates for investment income differ markedly between provinces. In fact, the difference between the highest-taxed province (Newfoundland & Labrador) and the lowest-taxed territory (Nunavut) reaches over 10 percentage points for certain types of income.

Here’s a comprehensive breakdown of the top combined federal-provincial/territorial tax rates for 2025:

The table clearly illustrates that across all provinces, capital gains remain the most tax-efficient form of investment income. As a result of the 50% inclusion rate, capital gains are effectively taxed at half the rate of interest income.

For many investors, eligible dividends offer the next most favorable tax treatment, thanks to the dividend tax credit mechanism. Meanwhile, interest income consistently faces the highest tax rates throughout the country.

Examples from Ontario, BC, Alberta

To better understand how these differences affect real-world investment returns, let’s examine three major provinces:

Ontario: With a top combined tax rate of 53.5% on interest income, Ontario ranks among the provinces with the heaviest tax burden. If you earn $10,000 in interest income and fall in the highest tax bracket, you’d keep just $4,650 after tax. The same $10,000 in eligible dividends would leave you with $6,070 after tax, while capital gains would net $7,320.

British Columbia: BC also imposes a 53.5% top rate on interest income. Yet, eligible dividends fare somewhat better in BC than Ontario, with a top rate of 36.5% compared to Ontario’s 39.3%. This means $10,000 in eligible dividends would yield $6,350 after tax in BC – $280 more than in Ontario.

Alberta: Consistently maintaining lower tax rates, Alberta stands out with a top rate of just 48.0% on interest income. This meaningful difference means high-income Albertans keep $550 more from every $10,000 of interest income than their counterparts in Ontario or BC. Plus, with a 34.3% rate on eligible dividends and 24.0% on capital gains, Alberta offers a more favorable investment tax environment overall.

It’s worth noting that these provincial top rates apply at different income thresholds. In most provinces, they kick in around $253,414, yet Alberta’s top rate doesn’t apply until income exceeds $362,961, offering additional advantages to moderately high-income earners.

Taxation of foreign investment income

Foreign investment income introduces additional tax complexities for Canadian investors. Beyond domestic considerations, you’ll need to navigate foreign tax rules, currency conversion, and potential double taxation issues.

Foreign dividends and interest

Unfortunately, foreign dividends don’t qualify for the dividend tax credit available for Canadian dividends. Instead, they’re treated as regular income and taxed at your full marginal rate. Many countries simultaneously impose withholding taxes (typically 15-25%) on dividends paid to non-residents.

For U.S. investments specifically, certain exemptions exist. Canadian residents are typically not subject to U.S. withholding tax on interest income. Additionally, the Canada-U.S. Tax Treaty provides withholding tax exemptions on U.S.-source dividend income earned within registered retirement accounts like RRSPs and RRIFs. Nevertheless, this exemption doesn’t extend to TFSAs, FHSAs, RESPs, or RDSPs, where U.S. dividends face a 15% withholding tax.

Currency conversion rules

The CRA requires all foreign income to be reported in Canadian dollars. For conversion, you have several options:

• Use the Bank of Canada exchange rate in effect on the day you received the income
• Apply the average annual rate for income received at multiple times throughout the year
• In certain situations, use exchange rates from other acceptable sources like Bloomberg, Thomson Reuters, or OANDA

For capital gains calculations, both purchase and sale prices must be converted to Canadian dollars using the exchange rate on the trade date rather than the settlement date. This currency impact can create additional gains or losses beyond the investment’s performance itself.

Foreign tax credit eligibility

Chiefly designed to prevent double taxation, foreign tax credits (FTCs) allow you to offset Canadian taxes with taxes already paid to foreign governments. To claim FTCs, you must:

1. Report your foreign income on your Canadian tax return
2. Have paid foreign taxes similar to Canadian taxes (sales or property taxes typically don’t qualify)
3. Complete Form T2209 (Federal Foreign Tax Credit)
4. Complete Form 428 for provincial/territorial foreign tax credits

The amount of FTC you can claim is limited to the lesser of the foreign tax paid or the Canadian tax payable on that same income. If you’ve paid more foreign tax than can be claimed as credit, you may carry forward the unused amounts for up to 10 years or carry them back up to 3 years.

Taxation of investment income in a corporation

Unlike individual investors, corporations face distinct tax treatment on investment income earned within the company. This differential treatment stems from integration principles in the Canadian tax system.

Corporate tax rate on investment income Canada

Corporate investment income is subject to substantially higher tax rates than active business income. As of 2025, the combined federal and Ontario corporate tax rate on investment income sits at 50.17%. This higher rate serves primarily to discourage using corporations as tax shelters for passive income.

For Canadian-controlled private corporations (CCPCs), part of this tax is refundable, creating a mechanism for tax integration. Small business owners should note that access to the small business deduction begins to reduce when taxable capital reaches $13.93 million and is completely eliminated at $69.67 million. Further, changes implemented after 2018 reduce the business limit based on investment income earned by a CCPC.

Capital dividend account (CDA)

The Capital Dividend Account is a special corporate tax account that allows shareholders to receive tax-free dividends. This notional account (not recorded in financial statements) tracks various tax-free surpluses, including:

• The non-taxable portion (50%) of capital gains minus capital losses
• Life insurance proceeds exceeding the policy’s cost basis
• Capital dividends received from other corporations

To distribute these amounts tax-free, the corporation must file an election form (T2054) with the CRA. Paying capital dividends exceeding the CDA balance triggers a steep 60% tax penalty on the excess amount. Hence, maintaining accurate CDA records is essential despite the account not appearing on financial statements.

Refundable dividend tax on hand (RDTOH)

The RDTOH account applies exclusively to private corporations and accumulates refundable portions of taxes paid. For CCPCs, this includes both refundable Part I tax on investment income and Part IV tax on dividends received.

Since 2019, corporations maintain two separate RDTOH accounts:

• Non-eligible RDTOH: Tracking refundable taxes on non-dividend investment income
• Eligible RDTOH: Tracking refundable taxes on eligible dividends

When corporations pay dividends to shareholders, they receive a refund of $1.39 for every $3.64 of dividends paid, up to the balance in the respective RDTOH account. This refund mechanism helps achieve integration in Canada’s tax system, preventing double taxation of corporate earnings.

How to reduce tax on investment income in Canada

Smart investors know that keeping more of your investment returns requires strategic tax planning. Luckily, Canada offers several powerful methods to minimize taxation on your investment income.

Use of TFSA, RRSP, FHSA

Registered accounts represent your first line of defense against investment taxation:

Tax-Free Savings Account (TFSA): Any investment growth inside a TFSA remains completely tax-free, with no tax on withdrawals. The 2025 contribution limit is $9,753.52, plus your unused contribution room from previous years.

Registered Retirement Savings Plan (RRSP): Contributions are tax-deductible (up to 18% of previous year’s earned income, capped at $42,887.63 for 2023), and investments grow tax-deferred until withdrawal. Ideally, you’ll withdraw during retirement when your income—and tax rate—are lower.

First Home Savings Account (FHSA): This newer option combines RRSP-like tax-deductible contributions with TFSA-like tax-free withdrawals for qualified first home purchases. The annual contribution limit is $11,146.88 with a lifetime maximum of $55,734.41.

Income splitting and prescribed rate loans

For families with different income levels, prescribed rate loans offer substantial tax savings:

Starting July 1, 2025, the prescribed rate drops to 3%, creating an excellent opportunity. Here’s how it works: A higher-income spouse loans money to a lower-income spouse at the prescribed rate. The borrower invests the funds, pays annual interest (which is tax-deductible), and reports investment income on their tax return—typically at a much lower tax rate.

For example, if Rebecca in the top tax bracket loans $139,336.02 to her lower-bracket partner Jimmy who earns 5% annually on the investment, the family could save approximately $6,966.80 in annual taxes.

Important: Always document these loans properly and ensure interest is paid by January 30th each year to avoid attribution rules.

Tax-loss harvesting and timing strategies

In non-registered accounts, consider:

• Tax-loss harvesting: Sell investments with unrealized losses to offset capital gains. These losses can offset current gains or be carried back three years or forward indefinitely.
• Beware superficial losses: The CRA disallows losses if you (or affiliated persons) repurchase the same investment within 30 days before or after selling.

Contact BOMCAS Canada today to speak with an experienced tax advisor and build a smarter investment strategy tailored to your specific situation.

Conclusion

Understanding investment taxation represents a crucial element in maximizing your after-tax returns across all investment types. Throughout this guide, we’ve seen how dramatically tax treatment varies between interest income (taxed at up to 53.53% in Ontario), Canadian dividends (benefiting from the dividend tax credit), and capital gains (with only 50% inclusion). These differences can significantly impact your wealth accumulation over time.

Strategic placement of investments becomes equally important as investment selection itself. Sheltering interest-bearing investments in registered accounts like TFSAs, RRSPs, or FHSAs while holding tax-advantaged investments like Canadian dividend stocks in non-registered accounts can substantially enhance your after-tax returns. Additionally, tax-loss harvesting, income splitting through prescribed rate loans, and proper timing of capital gains recognition offer powerful methods to reduce your overall tax burden.

Provincial tax differences also deserve careful consideration. Alberta residents enjoy markedly lower rates across all investment income types compared to higher-tax provinces like Ontario or Newfoundland & Labrador. This geographic variation may influence both investment decisions and retirement planning for many Canadians.

Foreign investment income adds another layer of complexity with withholding taxes, currency conversion requirements, and potential tax credits. Corporate investment income faces its own unique challenges with higher rates but potential advantages through mechanisms like the Capital Dividend Account.

The Canadian tax system rewards investors who understand its nuances. Contact BOMCAS Canada today to speak with an experienced tax advisor and build a smarter investment strategy tailored to your specific situation. Armed with knowledge about inclusion rates, dividend tax credits, registered account strategies, and provincial variations, you can make informed decisions that preserve more of your hard-earned investment returns for your future goals.

Key Takeaways

Understanding Canada’s investment tax landscape can dramatically impact your wealth-building strategy, with tax rates varying significantly by income type and province.

• Interest income faces the harshest taxation – taxed at your full marginal rate (up to 53.53% in Ontario), making it the least tax-efficient investment type compared to dividends and capital gains.

• Capital gains remain most tax-advantaged – only 50% of gains are taxable, effectively cutting your tax rate in half compared to interest income across all provinces.

• Canadian dividends benefit from tax credits – eligible dividends are grossed up by 38% but receive federal tax credits, resulting in lower effective tax rates than regular income.

• Registered accounts provide powerful tax shelter – TFSAs offer tax-free growth and withdrawals, while RRSPs defer taxes until retirement when rates may be lower.

• Provincial differences create significant opportunities – Alberta’s 48% top rate on interest versus Ontario’s 53.5% can save high earners $550 per $10,000 of investment income.

The key to maximizing after-tax returns lies in matching investment types to appropriate account structures and understanding your provincial tax implications. Strategic placement of interest-bearing investments in registered accounts while holding dividend-paying stocks in taxable accounts can substantially enhance long-term wealth accumulation.

FAQs

Q1. What are the tax brackets for investment income in Canada for 2025? The tax brackets vary by province, but generally range from 15% for lower incomes to up to 53.53% for the highest earners in provinces like Ontario. Interest income is taxed at your full marginal rate, while dividends and capital gains receive more favorable treatment.

Q2. How is capital gains tax calculated in Canada for 2025? In 2025, only 50% of capital gains are taxable. This means if you have a $10,000 capital gain, only $5,000 would be added to your taxable income. The tax you pay on this amount depends on your overall income and tax bracket.

Q3. What’s the difference in tax treatment between eligible and non-eligible dividends? Eligible dividends receive more favorable tax treatment than non-eligible dividends. They are grossed up by 38% (compared to 15% for non-eligible) and qualify for a larger dividend tax credit, resulting in lower effective tax rates.

Q4. How can I reduce taxes on my investment income in Canada? You can reduce taxes by using registered accounts like TFSAs and RRSPs, employing income splitting strategies with prescribed rate loans, and considering tax-loss harvesting in non-registered accounts. The specific strategy depends on your individual financial situation.

Q5. How does foreign investment income get taxed in Canada? Foreign investment income must be reported in Canadian dollars and is generally taxed as regular income. However, you may be eligible for foreign tax credits to avoid double taxation. Specific rules apply to U.S. investments, and withholding taxes may be applied by the source country.