If you hold your investments in a non-registered account
Non-registered investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition accounts have no special “taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition status” the way registered accounts, such as RRSPs or TFSAs, do.
All investments held in non-registered accounts are subject to tax, but not all investment income is taxed in the same way or at the same rates. Some investment income attracts less tax than others. This creates opportunities to minimize your overall taxes by using certain types of accounts to hold specific assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition classes.
As an investor, you’ll pay taxes on:
- interest-bearing investments
- dividendDividend Part of a company’s profits that it pays to shareholders in proportion to the total number of shares held. The Board of Directors sets the amount. For common shares, the amount varies. It may skip dividends if business is poor or the directors invest money in things like new equipment or buildings.+ read full definition-paying investments
- capital gains
- foreign investments.
How much tax you’ll pay depends on 4 things:
- The type of investment you made
- The tax laws where you live
- Whether your investments are held in a tax-sheltered plan
- Your income
How interest income is taxed
Any interest you earn on an investment is taxed as income at full rates. This means you pay tax on 100% of any interest income you earn. The rate you pay depends on your marginal tax rateMarginal tax rate The amount of tax that you have to pay on each extra dollar of income you make. As your income rises, so does your tax rate.+ read full definition.
How dividends are taxed
Follow these 6 steps to calculate the tax you’ll pay on investments that pay dividends.
- Add up your eligible dividends. These include most dividends from Canadian public companies and certain dividends from private companies.
- Multiply by 1.38. This number is your grossed-up dividends. (The amount added to the actual dividends is called the dividend gross up.)
- Add your grossed-up dividends to your income for the year.
- Calculate the tax on that grossed-up amount.
- Claim a federal dividend tax creditTax credit The amount you can deduct from your income when you file your taxes. This lowers the tax that you owe.+ read full definition of approximately 15% of the grossed-up dividends.
- Claim a provincial tax credit based on where you live.
Dividends other than eligible dividends
For dividends other than eligible dividends (for example, those paid by small business corporations) paid in 2014 and 2015, the gross-up factor will be 18% and the federal dividend tax credit will be 11.0169% of the grossed-up dividends.
The 2015 federal budgetBudget A monthly or yearly estimated plan for spending and saving. You work it out based on your income and expenses.+ read full definition announced a gradual decrease to the federal small business tax rateTax rate The rate at which you or a business pays tax on income. Often stated as a percentage, such as 25%.+ read full definition from 11% to 9% between 2016 and 2019. As a result, for 2016, the gross-up factor will be 17% and the dividend tax credit will be 10.5% of the grossed-up dividends. Further adjustments to the gross-up factor and the dividend tax credit will be made in 2017 and beyond.
Learn more about how dividends are taxed.
How capital gains from Canadian corporations are taxed
If you sell an investment for more than you paid for it, you get a capital gainCapital gain The money you make when you sell an investment or some other asset for more than you paid for it.+ read full definition. If you sell for less than you paid, you get a capital lossCapital loss The money you lose when you sell an investment or some other asset for less than you paid for it.+ read full definition. At tax time, you subtract your capital losses from your gains. This gives you your net gains. You pay tax on 50% − or half − of your net gains.
How foreign investments are taxed
If you receive interest, dividends or capital gains from investments outside Canada, the equivalent Canadian dollar value must be reported on your Canadian tax return and will be taxed accordingly. Foreign dividends do not qualify for the dividend tax credit. Interest-bearing investments like Certificates of Deposit (CDs) from the United States are taxed as income.
A withholding taxWithholding tax Tax that comes off your pay or other income and goes to the government before you get any money.+ read full definition may be deducted from your foreign investment income. However, you may be able to claim a foreign tax credit to prevent double taxation.
If you own specified foreign property costing more than $100,000, you must complete form T1135, Foreign Income Verification Statement, which can be filed electronically.
3 ways to reduce your taxes
1. Invest in tax-sheltered investments and plans
You don’t pay tax on what you earn while your money is in the investment or plan, but certain withdrawals are fully taxed as income. Examples: RRSPs, RESPs, RRIFs and permanent insurance. With a TFSA, you don’t pay any tax on what you earn while your money is in the plan – or when you take it out.
To take advantage of the lower tax rates on dividends and capital gains, consider:
- holding your interest-bearing investments inside a tax-sheltered plan, and
- keeping investments that pay dividends or create capital gains outside the plan.
2. Apply capital losses to reduce tax on unsheltered capital gains
At tax time, you’ll add up all your gains and losses from buying and selling unshelteredUnsheltered A regular investment or account that does not shelter your money from tax. In other words, you have to pay tax on your savings and the money you make investing them.+ read full definition investments. If you come out ahead, you have a net gain to report. Only 50% of this amount is taxable. If you lose money overall, you must declare a net loss. A net capital loss cannot be used to offset other sources of income.
However, you can carry a net capital loss back for 3 years to offset net capital gains in those years and claim a refund. Or, you can carry it forward indefinitely to offset future net capital gains. You can also apply your capital losses from previous years to offset new capital gains. Speak with a chartered professional accountant who specializes in income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition to help you figure out the best approach.
3. Make Canadian dividends your only source of income
Individuals with an incorporated private company or a substantial amount of money to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition can receive an amount of Canadian dividends tax-freeTax-free Money that you do not pay tax on.+ read full definition. The actual amount depends on the province and whether the dividends are classified as eligible or non-eligible.
Tax-sheltered investment optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition include:
- TFSATFSA See Tax-Free Savings Account.+ read full definition
- RRSPRRSP See Registered Retirement Savings Plan.+ read full definition
- RESPRESP See Registered Education Savings Plan.+ read full definition
- RRIFRRIF See Registered Retirement Income Fund.+ read full definition
- Permanent life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition