In most cases, if you earn interest or dividends, you have to report these amounts as income to the Canada Revenue Agency. However, there are exceptions, and understanding these exceptions and how to use them to your advantage can help you lower your tax burden.
Taxable Interest and Investment Income
If you earn interest from a bank account, a term deposit, a guaranteed investment certificate or a similar type of investment, it is taxable.
Similarly, interest earned on Canada savings bonds, treasury bills, life insurance policies, foreign interest, and dividends is also taxable. Finally, if you received interest on a tax refund from the CRA, you also have to report this as income.
Similar to reporting most interest and dividends as income, you must also report money you earn from the sale of shares and mutual fund units.
Essentially, if you sell any of these investments and you earn money on the sale, you have to report the capital gains.
In some cases, you may be able to defer your capital gains or claim an exemption either due to the type of investment or because you immediately reinvested the money. However, in most cases, capital gains from mutual funds and shares is considered taxable.
Interest from Registered Retirement Savings Plan
Contributions you make to your RRSP are not taxed and neither is interest earned from these savings plans. However, when you begin making withdrawals from your RRSP, these withdrawals are considered taxable income.
Tax-Free Savings Accounts
If you earn interest on or take dividends from a Tax-Free Savings Account, this interest is not taxed. In fact, it is not even subjected to tax when you withdraw the funds.
However, as of 2015, the CRA has begun to look closely at investors who are amassing significant amounts — six figures or more — in their TFSAs. Although the funds are meant to be tax-free, the CRA has begun to take the stand that the money is essentially employment income if the account holders are spending large amounts of time making trades and boosting their earnings.
Investments in Your Child’s Names
In most cases, if you make investments in your child’s name, you have to report interest earned as income. However, if the money you invest if from the Canada Child Benefit and the account is in your child’s name, the interest is considered your child’s income.
As of 2016, the basic personal amount is $11,474, which means that your child doesn’t have to pay income tax or file a return as long as he earns less than this amount.
Filing Your Income Tax Return
If you receive over $50 of taxable interest or other investment income, you will receive a T5 tax slip. However, if you receive less than that amount and don’t receive a T5 tax slip, you still must report it as income.
Report all of your investment income on line 121 of your income tax return. Even if you had immediately reinvested the investment income, you must report it on this line.