5 tax tips for investors

Tax and Estate Planning Advocate Doug Carroll explains the advantageous tax treatment on any money you earn as capital gains.

These tips outline how different investment income you earn is taxed, but it only applies to non-registered investments. The income you earn in a tax-free savings account (TFSA) is tax free, and investment income earned in a registered retirement savings plan (RRSP), or registered education savings plan (RESP) is tax-deferred. In the case of an RRSP or RESP, you would only pay tax on the investment income when you withdraw the funds. Learn more about the different types of investing accounts available.

1.      Interest

While interest earned on investments is directly taxable as income, the interest paid on money borrowed to earn non-registered income is normally deductible.

2.      Dividends

Foreign dividends are fully taxable, but Canadian dividends are taxed at effective rates significantly lower (or zero at lower income levels). If you claim your spouse or common-law partner as a dependent, you can claim both yours and your spouse’s Canadian dividends if it increases your spousal credit amount.

3.      Capital gains and losses

Capital gains are not taxed year-to-year, but instead are taxed on disposition (usually this is the sale of a security), and only half of the gain is taxable. If you have a year where you had capital losses, you can apply them against your capital gains this year and then either carry back to gains in any of the past three years or carry forward to gains any time in the future.

4.      Superficial losses

Be careful if you realized a capital loss then quickly got back into the market. If you, your spouse, your trust or corporation acquired the same security within 30 days before or after your transaction, the loss is denied, and simply added back to the adjusted cost base (ACB).

5.      Tracking adjusted cost base

You must track your ACB on non-registered investments so you can correctly report capital gains or losses on eventual dispositions (usually this is on the sale of your investment). Remember that reinvested dividends increase your ACB and any return of capital (not to be confused with a capital gain) decreases your ACB.

Learn more about how investment income is taxed on the Government of Canada’s website.