How Investment Income Is Taxed in Canada

Two investors hold $1,000 of investment income each, in the same kind of account, in the same year, at exactly the same salary. One pays $63.90 of tax on it. The other pays $296.50, which is more than four and a half times as much. Neither of them did anything clever or careless. The only difference is what kind of income it was.

That is the whole subject in one sentence. How investment income is taxed in Canada depends far less on how much you make than on which of four boxes the money arrives in, and the gap between the best box and the worst is large enough to be worth an afternoon of your attention.

Investment income is money your money earns, as distinct from money your work earns. It arrives in three basic forms. You lend money and are paid interest. You own a piece of a company and are paid a dividend. You buy something, it becomes worth more, and you sell it for a gain. Canada taxes those three things by three different sets of rules, and dividends split into two kinds with different rates again, which makes four.

This guide works all four through with the 2026 numbers, to the cent. Every rate comes from the CRA’s own bracket table, the Income Tax Act, or the worksheet the province publishes for its own return. Ontario is used for the worked examples because arithmetic needs a province. The federal half of every calculation, and every mechanic described here, is identical in all of them.

The map, before the detail

Here is what each kind of income does, at a $90,000 Ontario taxable income, which is the example carried through the entire guide.

Income type	How much enters your income	When it is taxed	Usual slip	Effective rate in the example
Interest (savings, GICs, bond coupons)	All of it	Each year, including compound GIC interest you have not been paid yet	T5	29.65%
Capital gain	Half of it	Only in the year you sell	see the note on slips below	14.82%
Eligible dividend (most TSX companies)	138% of it, then a credit comes back	In the year the T5 reports it	T5	6.39%
Non-eligible dividend (mostly small private corporations)	115% of it, then a smaller credit comes back	In the year the T5 reports it	T5	20.28%

Read the last column first. The same $1,000 costs 29.65% as interest and 6.39% as an eligible dividend from a Canadian public company. There is no strategy, no account and no timing trick in that table. It is purely the label on the income.

The example in full. Someone with $90,000 of taxable income in Ontario receives an extra $1,000 of investment income. Their marginal rate is the federal 20.50% bracket plus the Ontario 9.15% bracket, which is 29.65% combined, using the CRA’s current-year rates and brackets captured on September 14, 2026. The extra $1,000 does not cross a bracket edge: the next federal edge is $117,045 and the next Ontario edge is $107,785, and the arithmetic was checked in code up to $91,380 before any chart was drawn. Nothing in the example straddles two rates, which is what makes the percentages comparable.

A note on slips. The CRA’s line 12100 page lists the usual ones: a T5 for investment income, a T3 for distributions from a trust or an ETF, and a T5013 for partnership income. Two details on that page catch people out. Investment income under $50 may not generate a slip at all, and you are still required to report it. And your slips arrive from the institution, which means the CRA has them too, whether or not you notice them in your own mail.

Interest: the simplest rules and the harshest result

Interest has no mechanism at all. Every dollar goes into your income as a dollar, and it is taxed at your marginal rate like a dollar of salary.

On the $1,000 example, that is $296.50 of tax, leaving $703.50, an effective rate of 29.65%. There is no inclusion rate, no gross-up and no credit. Whatever your top bracket is, that is what interest costs.

This applies to savings account interest, GIC interest, bond coupons and the interest portion of most fixed-income funds. It is the worst tax treatment available to an ordinary investor, and it lands on the assets people usually think of as the safe ones.

The compound GIC trap

A compound GIC pays nothing until it matures. That does not postpone the tax. The CRA is explicit about it on the same line 12100 page: interest on a compound GIC is earned monthly and reinvested automatically, it is paid out only when the investment is cashed or matures, and you are still required to report the interest earned during each complete investment year.

So a five-year compound GIC generates five years of taxable income and one single payment, in year five. Four of those five tax bills have to be paid out of money that came from somewhere else. That is not a reason to avoid the product, but it is a reason not to buy one in a taxable account without knowing that the cash flow and the tax bill are on different schedules.

Why this is the number that decides account location

Because interest is taxed at the full rate every single year, it is the income type that loses the most to tax over time, and it is also the income type that gains the most from being inside a shelter. That is worth keeping in mind for the account section further down, and it is worth keeping in mind for the reason set out in our guide to compounding and why time beats timing: a percentage removed annually does not subtract from the total, it subtracts from the growth rate, and a lower growth rate compounds against you for as long as you hold.

Capital gains: taxed only when you sell, and only half of it

Two rules do all the work here, and the first one surprises people more than the second.

A capital gain is not taxed until you realise it. A holding that has doubled on paper produces no tax and appears nowhere on your return. The tax event is the sale. This is genuinely different from interest and dividends, which are taxed as they arrive whether you wanted the cash or not.

Only half of a realised gain enters your income. Paragraph 38(a) of the Income Tax Act, as consolidated to July 21, 2026, sets the taxable capital gain at one-half of the capital gain. The CRA’s T4037 capital gains guide carries the same figure in its year table, which reads “From 2001 to 2025: 1/2 (50%)”.

On the $1,000 example: the taxable half is $500.00, taxed at 29.65%, which is $148.25 of tax, leaving $851.75. The effective rate on the whole gain is 14.82%, exactly half the interest rate.

Notice what that is not. Canada does not have a separate capital gains rate the way the United States does. There is no preferential rate schedule to qualify for and no holding period to satisfy. Half of the gain is simply ordinary income, taxed at whatever your ordinary marginal rate happens to be. Someone in a high bracket pays half of a high rate, and someone in a low bracket pays half of a low rate.

Two related mechanics, each of which is a guide in itself. Capital losses are applied against capital gains, so a year in which you sold one winner and one loser is taxed on the net. And the gain itself is the sale price minus your adjusted cost base, not minus what you think you paid, which is why tracking ACB is its own discipline once you have bought the same holding more than once, reinvested a dividend or received a return of capital. Our adjusted cost base calculator keeps the running total that the gain is eventually measured against.

The two-thirds rate that never arrived

This deserves its own heading because it caused real damage.

An increase in the inclusion rate from one-half to two-thirds, on gains above $250,000 a year, was proposed in 2024. On January 31, 2025, the Department of Finance announced a deferral of that increase to January 1, 2026. It was never enacted. The Income Tax Act as consolidated to July 21, 2026 still reads one-half, and the CRA’s own year table still reads 1/2 (50%).

The cost of not knowing this was borne by people who sold genuinely good holdings in 2024 to crystallise gains ahead of a rate that never took effect. They paid the tax years early, gave up the compounding on the money they handed over, and bought nothing in return. If you are ever tempted to sell something you want to keep because of an announced tax change, the rule that saves money is simple: a proposal is not a law, and the place to check is the consolidated Act rather than the coverage of it.

Dividends: the gross-up that looks like a penalty and is not

The dividend rules look punitive at first glance because the first step inflates your income. The second step is where the money comes back.

Step one: the gross-up. Paragraph 82(1)(b) of the Act requires you to report more than you received. For an eligible dividend you report 138% of the cash, a gross-up of 38%. For a non-eligible dividend you report 115%, a gross-up of 15%. The inflated figure is the “taxable amount” that appears on your T5 and goes on your return.

Step two: the credits. Two of them, one federal and one provincial, both calculated on that same inflated taxable amount. Section 121 sets the federal dividend tax credit at 6/11 of the eligible gross-up, which works out to 15.0198% of the taxable amount, and 9/13 of the non-eligible gross-up, which is 9.0301% of the taxable amount. Ontario’s own credit, from Worksheet ON428 line 61520, is 10% of the taxable amount of eligible dividends and 2.9863% of the taxable amount of non-eligible dividends.

Here is the whole thing on $1,000 of cash, at the example income.

Step	Eligible dividend	Non-eligible dividend
Cash received	$1,000.00	$1,000.00
Gross-up	38%	15%
Taxable amount on the T5	$1,380.00	$1,150.00
Federal tax at 20.50%	$282.90
Less federal dividend tax credit	$207.27
Federal tax after the credit	$75.63	$131.90
Ontario tax at 9.15%	$126.27
Less Ontario dividend tax credit	$138.00
Ontario tax after the credit	$-11.73	$70.88
Total tax	$63.90	$202.79
You keep	$936.10	$797.21
Effective rate on the cash	6.39%	20.28%

The negative number is not a typo

The Ontario line on an eligible dividend is minus $11.73. The provincial credit, $138.00, is larger than the provincial tax on the dividend itself, $126.27. The dividend does not merely pay no Ontario tax. It reduces the Ontario tax on the rest of your income by $11.73.

One condition attaches to that, and it matters. The credit is non-refundable, so it needs other Ontario tax to absorb it. If your only income were eligible dividends and there were no other provincial tax to shave, the surplus would have nothing to work against rather than arriving as a cheque. In the example, where the dividend sits on top of $90,000 of other income, there is plenty for it to absorb into.

A real year of dividends, on the record

Abstract percentages are easy to argue with. Here is an actual payer.

Royal Bank declared $1.76, $1.64, $1.64 and $1.54 per common share across four consecutive quarters, $6.58 in total, as reported in its Q3 2026 Supplementary Financial Information, page 5. Someone holding 100 shares through those four quarters received $658.00 in cash.

Line	Amount
Cash dividends received, 100 shares at $6.58	$658.00
Taxable amount on the T5, grossed up 38%	$908.04
Tax at the example bracket, before credits	$269.23
Federal dividend tax credit	$136.39
Ontario dividend tax credit	$90.80
Total credits	$227.19
Tax actually paid	$42.04
Effective rate on the $658 received	6.39%

The $908.04 line is the one that generates complaints. You received $658 and your return says $908.04, which feels like being taxed on money you never got. Follow it two rows further. The gross-up raised the tax bill by inflating the base, and then the credits handed back $227.19 of a $269.23 bill. Forty-two dollars of tax on $658 of income is what the mechanism actually produces. To run the same arithmetic against a holding of your own, our dividend income calculator takes the share count and the payment.

Eligible against non-eligible

The two kinds get different gross-ups and different credits, and the practical difference is 6.39% against 20.28% on identical cash.

Eligible dividends are what Canadian public companies almost always pay. If you own TSX-listed shares directly or through a Canadian equity fund, this is the column that applies to you, and it is the reason a Canadian dividend payer survives a taxable account better than anything else you can hold. The names that pay them, ranked, are on our page of Canadian dividend stocks.

Non-eligible dividends come mostly from small private corporations. If you own a business through a CCPC and pay yourself in dividends, this is your column. For an ordinary investor buying listed shares, it rarely comes up, and the reason it appears in this guide at all is that people assume the 6.39% figure applies to every dividend. It does not. The label is set by the payer, and it is printed on the slip.

Foreign dividends get neither

One sentence on the CRA’s line 12100 page removes an entire category from the above: “Foreign dividends do not qualify for the dividend tax credit.”

No gross-up, no credit, no preferential treatment. A dividend from a US or international company is included in your income at its full amount and taxed at your ordinary marginal rate, which is to say it is taxed exactly like interest. That has consequences for which account you hold it in, and those have their own section below.

The four side by side

The order, best to worst, on identical cash:

1. Eligible dividend, $936.10 kept. The gross-up and credit combination ends up cheaper than any other way of receiving money in Canada at this income. 2. Capital gain, $851.75 kept. Half the income, half the tax, and you choose the year it happens. 3. Non-eligible dividend, $797.21 kept. A real credit, a smaller one. 4. Interest, $703.50 kept. No relief of any kind.

The spread between the top and the bottom line is $232.60 on $1,000. On $10,000 a year of investment income it is $2,326 a year, repeating, against the same gross income, for as long as the portfolio is held the same way.

The honest limits on every percentage above

This section exists because the numbers above are precise enough to be misused, and the most likely misuse is carrying them up the income ladder.

Every combined rate here is the federal bracket rate plus the Ontario bracket rate, and nothing else. The $90,000 income was not chosen at random. At that income, Ontario basic tax with only the basic personal amount of $12,989 claimed comes to $5,495.79, which is below the $5,818 threshold where the Ontario surtax begins. The surtax in this example is exactly zero rather than roughly zero, and the Ontario health premium is flat across the $72,000 to $200,000 band, so it does not move either. That is what makes the four percentages directly comparable to one another.

It is not zero further up. Ontario charges a surtax of 20% of basic provincial tax above $5,818, plus a further 36% above $7,446, per the CRA’s T4032ON payroll tables for January 2026. The surtax is charged on tax rather than on income, so it raises the effective rate on all four income types at higher incomes. Do not carry 6.39%, 14.82%, 20.28% or 29.65% to an income above this example and expect them to hold. The ranking of the four is robust. The specific percentages are not.

And every province is different. Each sets its own bracket ladder and its own dividend tax credit, so the provincial half of every figure above changes the moment you cross a border. The federal half does not, and neither does any mechanic in this guide: the one-half inclusion rate, the 38% and 15% gross-ups, the 6/11 and 9/13 federal credits and the treaty rules below are identical in every province and territory.

For an answer that uses your own province and your own income rather than this example, our capital gains tax calculator applies the current ladder to a gain you are actually considering.

US dividends, and why the account matters more than the stock

The United States withholds tax on dividends paid to Canadian residents before the money ever reaches you. Article X(2)(b) of the Canada-United States Tax Convention caps that withholding at 15%. Article XXI then exempts from it a trust operated exclusively to administer or provide pension, retirement or employee benefits.

That exemption is the whole story. An RRSP or a RRIF is exactly such a trust. A TFSA is not, because it is not a retirement arrangement in the treaty’s terms, and so the withholding sticks.

Where the $1,000 US dividend lands	What happens	You end up with
RRSP or RRIF	Article XXI exempts it, nothing is withheld	$1,000.00, before eventual withdrawal tax
TFSA	15% withheld at source, no credit available inside a TFSA	$850.00
Taxable account	$150.00 withheld, the full $1,000 taxable here with no gross-up, withholding recovered as a federal foreign tax credit	$703.50

Three things in that table are worth drawing out.

The taxable account is not as bad as it looks. The $150 withheld in the United States is not lost. It comes back as a federal foreign tax credit on line 40500, because the income was on your Canadian return in the first place and the CRA gives credit for tax already paid on it abroad. What you are left with, $703.50, is identical to the result on $1,000 of Canadian interest, to the cent. A US dividend in a taxable account is an interest-grade income stream for tax purposes.

The TFSA is the one place the money is genuinely gone. Nothing was ever reported on a Canadian return, so there is no Canadian tax to claim a credit against, and the treaty exemption does not reach a TFSA. The $150 is not deferred or recoverable. It is $150 of a $1,000 dividend, every year, for as long as you hold the position there. That is the single most expensive detail in this guide, and it lives inside the account everyone describes as tax-free. The rest of what a TFSA does, which is a great deal, is in our guide to how a TFSA works.

The RRSP’s $1,000 is not permanently free. Nothing is withheld, and the whole dividend compounds, but an RRSP taxes on the way out. Every dollar eventually withdrawn is ordinary income at your rate then, and that includes this one. The treaty removes a tax at source; it does not remove the tax the account was always going to charge, which our guide to how an RRSP works sets out in full.

What this implies about location

Put the four rates and the treaty together and a rough order of preference falls out for investments you already own.

– Interest and US dividends are the two most heavily taxed income streams in a taxable account, at 29.65% in the example, and they are the ones that gain the most from being sheltered. The US dividend belongs in the RRSP specifically, not merely in any registered account, because that is the only one the treaty exemption covers. – Canadian eligible dividends survive a taxable account better than anything else, at 6.39%, which makes them the most defensible thing to leave outside when the registered room is full. – Capital gains give you the timing, since nothing is taxed until you sell, which makes a long-held growth position relatively cheap to hold in a taxable account whether or not it is sheltered.

None of that is advice to buy anything. It is about where to keep what you already hold. Which account to fill in the first place is a separate question with its own answer, worked through in our guide to which account to fill first, and the holdings ranked for a retirement account are on our RRSP stocks page.

Four mistakes with a price tag

Selling winners to front-run the two-thirds inclusion rate. It was proposed, then deferred to January 1, 2026 by the Finance release of January 31, 2025, and never enacted. The Act as consolidated to July 21, 2026 reads one-half and the CRA’s table still reads 1/2 (50%). People sold real holdings in 2024 to beat a rate that never arrived, paid the tax years early on gains they would otherwise still be compounding, and received nothing for it.

Holding US dividend payers in a TFSA because a TFSA is tax-free. The treaty exemption covers retirement trusts and a TFSA is not one, so 15% is withheld and there is no way to claim it back. That is $150 of every $1,000 of US dividends, permanently, against $0 in an RRSP. Same stock, same dividend, same investor, a $150 difference decided by which account it sits in.

Avoiding Canadian dividend payers in a taxable account because the gross-up “adds phantom income”. The gross-up is step one of two. On the Royal Bank ledger above, $658 of cash became $908.04 of taxable amount and $269.23 of tax before credits, and then $227.19 of credits came back, leaving $42.04. An effective rate of 6.39% against 29.65% on the same money as interest is the opposite of a penalty. Judging the mechanism by the gross-up alone is reading the first line of a two-line calculation.

Sheltering the wrong income. A GIC in the taxable account and a Canadian dividend payer in the TFSA is the arrangement that costs the most, because interest is the most heavily taxed income there is at 29.65% and the eligible dividend is the least at 6.39%. The shelter is worth the most where the tax is worst. This is not a reason to change what you own. It is a reason to check which wrapper each thing you already own is sitting in.

Questions people actually ask

My stock is up 40% and I have not sold. Do I owe tax on that? No. A capital gain is taxed only when it is realised, which means when you sell. An unrealised gain appears nowhere on your return and costs nothing, however large it gets. The trade-off is that you also cannot claim an unrealised loss.

Is there a separate capital gains tax rate in Canada? No, and this is the most common misunderstanding. Half of a realised gain, under s.38(a), is added to your ordinary income and taxed at your ordinary marginal rate. At the example income that produces an effective 14.82% on the whole gain, but the underlying rate is simply your own bracket.

Why does my T5 show more than the dividends I received? That is the gross-up under s.82(1)(b): 38% added for eligible dividends, 15% for non-eligible. You are taxed on the inflated figure and then given a federal credit of 15.0198% of it and, in Ontario, a further 10%. The credits more than repay the extra tax the gross-up created.

Did the capital gains inclusion rate go up to two-thirds? No. The increase was proposed, then deferred to January 1, 2026, and never enacted. The Income Tax Act as consolidated to July 21, 2026 still sets the taxable portion at one-half.

I earned $30 of interest and never received a slip. Do I report it? Yes. The CRA’s line 12100 page states that you may not receive a T5 for investment income under $50, and that you are still required to report the income.

Which is better for tax, a dividend or a capital gain? At the example income, an eligible dividend is cheaper on the year it is paid, at 6.39% against 14.82%. A capital gain gives you something the dividend cannot: control of the year. Nothing is taxed until you sell, so a gain can be realised in a year when your income is lower, and until then the untaxed amount keeps compounding.

What to carry away from this

Four rules, and everything else in this guide is the arithmetic behind them.

Interest is taxed hardest, at your full marginal rate, every year, including compound GIC interest you have not been paid. Capital gains are taxed at half that, only when you sell, and the inclusion rate is still one-half whatever you may have read in 2024. Canadian eligible dividends are taxed most lightly of all, once the gross-up and the two credits are both counted. Foreign dividends get none of that relief and are taxed like interest, plus a 15% withholding that only an RRSP escapes.

None of those four facts depends on picking a better investment. They depend on knowing what kind of income a holding produces and which account it produces it in, which is knowable in advance, free to act on, and worth $232.60 per $1,000 a year at the top of the range in this guide.