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What investment revenue needs to be taxed?

07 March 2023 by Taxo
A smiling woman that is compiling her taxes

Unlike traditional savings, investing independently can be a great way to grow your money. But be careful: you have to pay taxes on your investment income. Do you really have to report all your taxable capital gains on your tax returns? Yes! It’s the law! 

What is a capital gain?

When you sell a security at a higher price than you paid for it, you earn a capital gain. It’s the difference between the purchase cost and the selling price, less expenses incurred at the time of sale. Only half of this gain will be added to your income.

What is interest income?

This is income from investments such as guaranteed investment certificates (GICs), term deposits, bonds or savings accounts. It is fully taxable on the anniversary of the acquisition date. This applies to interest received as well as interest accruing on compound interest investments. For example: 

  • On May 31, 2022, you acquired an investment that will earn compound interest until it matures in May 2023
  • In 2022, you don’t have to report any interest accrued as at December 31, 2022
  • Instead, you will be taxed in 2023 on interest accrued between June 1, 2022 and May 31, 2023

How is dividend income taxed?

Income generated by a Canadian corporation is first taxed within the corporation. When it is paid to the individual in the form of dividends, it is then taxed in the hands of the individual. This type of income receives more favourable tax treatment because it qualifies for the dividend tax credit.

When do I have to pay tax on investment income?  

All your taxable earnings must be included on your tax return for the year you received the income. The deadline is always April 30 of each year.

How do I report the different types of investment income?

Regardless of the type of investment in your portfolio, the income generated on these securities may be taxable as investment income or capital gains. They must be included on your tax return, unless they are held in registered accounts (e.g. RRSP, TFSA, RRIF, RESP).

What is the tax rate on my earnings?  

Since your taxable earnings will be added to your other taxable income (e.g. employment income, rental income, pension income), the tax rate will be based on your total taxable income. Consult the tax tables on the following websites:   

How do I calculate the cost of my investment when calculating taxable capital gains?

If you purchased identical securities at different times (e.g. shares of the same company), you must use the average cost method. For example:

  • In 2010, you bought 50 shares of ABC Inc. for $5
  • In 2012, you bought another 50 shares of the same company for $6
  • You sold 50 shares in 2022 at $10 per share
  • Your capital gain is:  
    • Proceeds of the sale: $500 (50 shares at $10)   
    • Calculation of average cost:   
      • 50 shares at $5 plus 50 shares at $6 = $550  
      • $550 divided by 100 shares held = $5.50/share  
      • Average cost: 50 shares x $5.50 = $275  
    • Total gain: $225 ($500 minus $275)  
    • Since capital gains are taxed at 50%, $112.50 (50% of $225) will be added to your income on your tax returns

How do I calculate tax on dividends paid?

When you receive dividend income from a Canadian corporation, it is increased by the applicable rate and taxable. You are also entitled to a tax credit calculated on the amount of taxable dividends. 

This dividend income is added to your taxable income and entitles you to a dividend tax credit. The credit may vary from year to year, so be sure to consult tax guides to find out the rates.

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If I have foreign investments, how do I report them?

When you report the sale of assets denominated in a foreign currency, you must calculate the acquisition cost and proceeds of the sale in Canadian dollars (exchange rate in effect on both dates).

All Canadian residents are required to report all income from Canadian and foreign sources. All investment income received from foreign assets (e.g. dividends, interest) must be included on the income tax return of the person who received the income.

If the total cost of your foreign assets exceeds CA $100,000 at any time during the year, you will be required to complete Form T1135 (external site) with your tax return. If you do not comply with this requirement, you could face significant penalties. 

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When is income considered a “capital gain” and when is it “business income”? 

It depends! Deciding whether income is capital gain income or business income depends on a set of facts. In other words, determining the type of income is purely subjective.   

Capital gains are taxable at 50% while business income is taxable at 100%. So it’s important to distinguish between the two. To avoid falling into a trap, we suggest that you consult a tax professional who can answer your questions. That way, you’ll be able to reduce the risk that tax authorities will qualify your transaction differently. 

What if I have capital losses?  

You incur a capital loss when the sale price is lower than the purchase price. Generally, if you suffered a deductible capital loss in a year, you must apply it to any taxable capital gain for that year. If you still have a loss after this, it will be part of your net capital loss calculation for the year. You can use a net capital loss to reduce any taxable capital gain for the previous three years or any subsequent year. 

Make sure your loss is not a superficial loss. This can occur if you acquire the same property or identical property during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.

Can I claim expenses as a self-directed investor?

Brokerage fees and commissions may be deductible. Choosing a broker that does not charge any commission fees is advantageous because it leaves you more money to invest. That said, related expenses may be deductible. These are sales costs incurred in the sale. You can deduct these expenses when calculating your capital gains or losses. 

You may also be able to deduct interest paid on money borrowed to invest and acquire shares. It will qualify as an interest expense and can help you reduce your taxable income.

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Where can I find the tax slips I need to file my tax return?

At National Bank Direct Brokerage, all tax slips are made available on the brokerage platform around March. You’ll find them in the “Documents” menu under “Tax Slips.” 

What is your after-tax return?

Remember that you must report your investment income, including your capital gains, it’s the law! As a self-directed investor, you can predict the tax rate in advance and plan accordingly. Get into the habit of saving money for taxes and consult a tax professional if you need to adapt your investment strategies to maximize your after-tax return. 

Plan: it will help you avoid surprises when filing your tax returns.
Consult: it’s the best way to help you better understand your tax obligations.

Learn more about tax impacts of self-directed investments

Read more articles

Key takeaways

  • Capital gain is the difference between the purchase cost and the selling price of a security. 

  • Interest revenue is income from investments such as guaranteed investment certificates (GICs), term deposits, bonds or savings accounts. 

  • Dividend income must be added to your taxable income and entitles you to a dividend tax credit (varies for federal and provincial governments). 

  • All gains need to be added to your income taxes before April 30th of each year. 

  • To maximize your after-tax return, you can estimate your taxe rate in advance and plan accordingly. Consult a tax professional to see how it can be implemented into your investment strategy.

Legal Disclaimers

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently, and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

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