If you earn interest, capital gains, or dividends income, you have to report these amounts as investment 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. Finally, if you received interest on a tax refund from the CRA, you also have to report this as income.
- If you receive over $50 of taxable interest or other investment income, you will receive a T5, Statement of Investment Income tax slip. You still have to report earned interests below $50 even if you did not receive a T-slip for them.
- If you earned interest from a trust, you will receive a T3, Statement of Trust Income Allocations and Designations tax slip. You may also receive interest income reported in T5013, Statement of Partnership Income.
- If you receive interest income from an employee profit-sharing plan, it will be reported on a T4PS slip. Also, the T5008, Statement of Securities Transactions slip can report interests earned on securities and bonds.
Foreign interests and dividends are taxed together in the same way a regular interest income is taxed. The reason being is that foreign dividends are not eligible for the federal dividends tax credit.
Similar to reporting most interest and dividends as income, you must also report the 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 are considered taxable.
Capital gain income can be reported on T3 slips, T5 slips, T5013, T4PS, or T5008 slip. You also have to report capital gains earned from selling properties not reported on a slip such as; sale of land, sale of personal-use property, etc.
If you receive dividends from shares in Canadian corporations, you will have to report the gross-up amount and claim a federal dividends tax credit for it.
Similar to other types of investment income, dividends are reported in many slips as eligible or other than eligible dividends. The type of dividends dictates the taxable amount and the credit you can claim.
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, over the past few years, the CRA has looked 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
Investments you make in your child’s name receive different treatments depending on the type of investment and the child’s age.
Children under 18 years old
The money you contribute to an investment account in your child’s name that gives out interests or dividends will accredit back to you. You will have to report this as income.
If the investment gives capital gain income, then it is considered the child’s income so your child will report the amount in their tax return.
If you invest your child’s Canada Child Benefit in any type of investment, this will be considered income for your child since this benefit was meant for them.
Children 18 years old or older
Once the child turns 18 years old, these investments are considered as their income.
Filing Your Income Tax Return
Different types of investments are reported differently in your income tax return:
- Report interest, foreign interest, and foreign dividends on line 12100
- Report Canadian dividends taxable income on line 12000
- Report capital gain income on line 12700. However, for the capital gain income, you will have to complete schedule 3 as well.
Use the federal worksheet to help you calculate the investment income and direct you on where to report them.
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