How Is Investment Income Taxed?

Keep reading to learn about how investment income is taxed to you personally, and the tax deductions that you can claim to reduce the taxable amount of investment income.

There are three types of investment income that an individual can earn:

1. Interest Income
Interest income is typically earned on cash savings accounts, government bonds, and bonds issued by large companies to investors. Interest income is fully taxable to you at your marginal tax rate.

2. Dividend Income
Dividends are taxable to you in the year that you receive them. There are two types of dividends for tax purposes: eligible dividends and ineligible dividends. Eligible dividends are taxed at a lower rate than ineligible dividends. Eligible dividends are normally paid by publicly traded companies, whereas ineligible dividends are paid by Canadian private companies. To determine whether you received an eligible or ineligible dividend, look at the tax slip issued to you, as it should be specified on there.

3. Capital Gains
Capital gains are earned when you sell publicly traded shares, mutual funds, or real estate for a profit. In Canada, only 50% of a capital gain is taxable to you. Similarly, only half of a capital loss is tax-deductible. Capital losses are unique in that they can only be deducted from capital gains realized in the current year or the three preceding years.

The most common deductions that you can claim to reduce the taxable amount of investment income are:

•  Interest paid on money borrowed to earn investment income. This includes interest paid on mortgages, bank loans and lines of credit.
• Professional fees paid to a lawyer or accountant.
• Financing costs incurred to arrange a loan, mortgage or line of credit.

So Here’s the Tip:
Before making an investment, make sure you know the tax rules surrounding investment income. Otherwise, you could end up paying more than your share in taxes.

If you are planning on preparing your own return this year, please have a look at our 2014 personal tax return checklist for some guidance. Also, make sure to have a look at this article on what 2014 personal tax credits you can claim.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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