A sound financial plan looks across your entire financial picture — not just your investments, but how those investments are structured, held and taxed over your lifetime. Tax planning is one of the most impactful components of that process, and understanding how your investments are taxed is an important step you can take toward building long-term wealth.

What are the types of investment income?

In Canada, investment income generally falls into three categories, each taxed differently by the Canada Revenue Agency (CRA):

• Interest income - earned from savings accounts, GICs, and bonds, taxed at your full marginal rate
• Dividends - distributions from companies, with Canadian dividends benefiting from preferential tax treatment through the dividend tax credit
• Capital gains - profit from selling an asset for more than you paid, with only a portion included in your taxable income

Knowing these distinctions helps you make more informed investment decisions. Working alongside a financial advisor and tax professional, you can evaluate strategies that consider tax implications and overall portfolio alignment.

Interest income and how it’s taxed

What is interest income?

Interest is the income you receive from certain types of accounts and investments or from lending money to someone else. The most common accounts and investments that produce interest income include:

• Savings accounts
• Guaranteed investment certificates (GICs)
• Fixed-income investments, such as government or corporate bonds.

How is interest income taxed in Canada?

Interest income receives no special tax treatment from the CRA. It is added to your other income and taxed at your marginal tax rate — the same rate that applies to employment income. This makes interest income the least tax-efficient type of investment income, which is why investors often choose to hold interest-bearing investments inside registered accounts such as a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF), where interest grows tax-deferred.

Is savings account interest taxable?

Yes. Interest earned in a standard savings account is fully taxable in Canada. Even if you don't withdraw the money, the interest credited to your account each year must be reported as income on your tax return.

An Edward Jones financial advisor can help you determine an appropriate tax-efficient investment for your interest-bearing investments based on your financial situation.

Dividends and how they’re taxed

What is dividend income?

A dividend is a distribution by a company to its shareholders. Not all companies pay dividends, but for those that do, the tax treatment in Canada depends largely on where the dividend originates.

How is dividend income taxed in Canada?

Canadian dividends receive preferential tax treatment through the dividend tax credit, which helps reduce the amount of tax owing. There are two types:

• Eligible dividends are generally paid by publicly traded companies, such as those listed on the Toronto Stock Exchange. They carry a higher gross-up and a larger dividend tax credit.
• Non-eligible dividends are typically paid by Canadian-Controlled Private Corporations (CCPCs). They carry a smaller gross-up and a lower dividend tax credit.

Foreign dividends are taxed as ordinary income at your marginal tax rate, similar to interest income. A foreign tax credit may apply if you've paid withholding taxes in another country.

Do dividends count as income?

Dividends are included in your taxable income. However, the dividend tax credit and the gross-up mechanism mean that eligible Canadian dividends are taxed more favourably than interest income or foreign dividends. The exact tax impact depends on your province of residence and your marginal tax rate.

An Edward Jones financial advisor can help you understand how dividend income fits into your overall tax picture.

Capital gains and how they’re taxed

What is a capital gain?

A capital gain is an increase in an asset's value above the original purchase price. Capital gains can apply to stocks, mutual funds, exchange-traded funds (ETFs), and real estate (other than your principal residence).

When do you have to pay tax on capital gains?

Capital gains are generally taxable in the year they are 'realized', which is generally when the asset is sold. However, capital gains can also be realized in the form of a mutual fund capital gain distribution, meaning you could have capital gains even if you didn't sell the fund. These distributions are typically reported to you on a T3 or T5 depending on the type of fund.

Capital gains inside registered accounts such as an RRSP or TFSA are not subject to tax while the funds remain in the account.

How are capital gains taxed in Canada?

Capital gains are not taxed at a specific tax rate, but rather, have an 'inclusion rate', which means that a portion of the capital gain is included in your income. The current capital gains inclusion rate is 50% for all taxpayers — individuals, corporations, and trusts. This means that 50 cents of every dollar of capital gain is included in your taxable income.

Are capital gains considered income?

The portion of a capital gain that falls within the inclusion rate is added to your taxable income for the year. However, capital gains are still taxed more favourably than interest income in most situations because only a portion of the gain is included in income.

What about short-term capital gains?

Canada does not distinguish between short-term and long-term capital gains the way the United States does. Whether you hold an asset for one month or 20 years, the same inclusion rate applies. What matters is whether the gain is classified as a capital gain or as business income. If the CRA determines that your trading activity constitutes a business — for example, if you trade frequently with the primary intent of profiting from price changes — the full gain may be taxed as business income rather than at the capital gains inclusion rate.

An Edward Jones financial advisor can help you understand how your investment activity may be classified from a tax perspective.

Capital gains vs. dividends: which is more tax-efficient?

This is one of the most common questions among Canadian investors, and the answer depends on your personal situation.

Both capital gains and eligible Canadian dividends are generally taxed more favourably than interest income. In most provinces, taxpayers in middle- and upper-income brackets pay less tax on eligible Canadian dividends than on capital gains, thanks to the dividend tax credit. However, at certain income levels and in certain provinces, the advantage can shift.

An Edward Jones financial advisor can help you evaluate the tax efficiency of your investment mix and tailor a strategy to your goals.

Taxation by account type

The account that holds your investments can have a significant impact on how and when investment income is taxed. This is the foundation of asset location: a strategy that involves placing investments in the appropriate accounts  that can potentially impact your after-tax returns.  Understanding the differences allows you to make informed decisions about where to hold each type of investment.

Non-registered accounts

Interest income, dividends, and capital gains earned in a non-registered (taxable) account are reported on your annual tax return. Tax is owed in the year the income is received or realized.

RRSP and RRIF

Contributions to a Registered Retirement Savings Plan (RRSP) are tax-deductible, and investment income inside the account grows tax-deferred. You pay tax only when you withdraw funds, at which point withdrawals are taxed as ordinary income. Upon converting your RRSP to a RRIF, the same tax-deferred growth continues until withdrawals begin.

TFSA

Contributions to a Tax-Free Savings Account (TFSA) are made with after-tax dollars, but investment income (whether interest, dividends, or capital gains) grows completely tax-free. Withdrawals from a TFSA are also tax-free, regardless of how much the account has grown. This makes the TFSA one of the most valuable tools available to Canadian investors.

RESP

Investment income earned inside a Registered Education Savings Plan (RESP) grows tax-sheltered until withdrawn. When funds are paid out to a student as Educational Assistance Payments (EAPs), they are taxed in the student's hands, often at a low or zero marginal rate.

FHSA

The First Home Savings Account (FHSA) combines features of both the RRSP and TFSA: contributions are tax-deductible, and qualifying withdrawals made to purchase a first home are tax-free.

Tax-efficiency strategies for investors

Building a tax-efficient investment portfolio is about more than picking the right investments. It's also about how and where those investments are held. Here are some strategies worth exploring with your financial advisor.

• Asset location: Placing higher-taxed investment income (such as interest from bonds or GICs) inside registered accounts shelters it from annual taxation. Investments that generate lower-taxed income (such as Canadian dividend-paying equities or growth-oriented holdings) are often suited for non-registered or TFSA accounts.
• Tax-loss harvesting: If you hold investments that have declined in value, selling them to realize a capital loss can offset capital gains you've realized elsewhere. Capital losses can be carried back three years or carried forward indefinitely to offset gains in other tax years.
• Dividend income in retirement: For those with lower income, eligible Canadian dividends can be particularly tax-efficient. The dividend tax credit can significantly reduce — or even eliminate — tax owing at lower income levels.
• TFSA optimization: Maximizing your TFSA contribution room and holding your highest-growth assets there means growth accumulates and can be withdrawn entirely tax-free.
• Charitable giving of securities: If you hold securities with large unrealized gains, donating them directly to a registered charity eliminates the capital gains inclusion entirely, while also providing a charitable donation tax credit.

An Edward Jones financial advisor can work with you and your tax professional to help build a strategy tailored to your personal situation and long-term goals.

How to estimate taxes on investment income

Understanding approximately how much tax you may owe on investment income involves a few key steps:

1. Identify your investment income type - interest, eligible dividend, non-eligible dividend or capital gain.
2. Apply the relevant adjustment - For capital gains, multiply the gain by the applicable inclusion rate (50%). For eligible dividends, gross up the dividend by 38%; for non-eligible dividends, gross up by 15%.
3. Add to your other income - The adjusted amount is combined with your other income for the year.
4. Apply your marginal tax rate - Your combined federal and provincial rate applies to the adjusted income.
5. Apply tax credits - For eligible and non-eligible dividends, apply the applicable federal and provincial dividend tax credits to reduce tax owing.

The table below shows the top combined federal and provincial marginal rates for each type of investment income by province, providing a useful starting reference.

Tax rates by province

The table below shows the highest combined federal and provincial marginal tax rates for investment income, current as of January 1, 2025. These rates apply to the top income bracket in each province or territory.

Source: Canada Revenue Agency. Current as of January 1, 2026. These are top marginal rates. Your actual rate depends on your total income and province of residence.

Stay informed

Understanding the tax implications of your investments can be challenging but worthwhile, as careful tax planning can help lower your tax bill and create a more tax-efficient investment portfolio. Work with an Edward Jones financial advisor and tax professional to manage your investments and take advantage of any available tax planning opportunities.