Taxes can have a large impact on your return. There are different tax rules depending on the type of investment you have. For example, there are different rules for investments that:
- Pay interest
- Pay dividends
- Produce a capital gain when sold
- Are a foreign investment
Calculating your net return after tax: Sallia's story
To see how taxes affect an entire investment portfolio, read Calculating your net return after tax: Sallia's story
Remember that if you invest in a sheltered plan, such as a Registered Retirement Savings Plan (RRSP), you won’t pay the tax due until you withdraw the money out of the plan.
What taxes will I pay on interest?
- Interest is treated the same as income from your job. The rate you pay depends on your tax bracket.
- You pay tax on 100% of any interest you earn.
What taxes will I pay on dividends from Canadian corporations?
Dividends get better treatment at tax time than interest or job income. Here's how to calculate the tax:
- Add up your dividends.
- Add 44% (this is called dividend gross-up).
- Add your grossed-up dividend to your income for the year.
- Calculate the tax on that grossed-up amount.
- Claim a federal dividend tax credit of18% of the grossed-up dividends.
- Claim a provincial tax credit of 6.4% of the grossed-up dividends.
Example: Let’s say you earned $800 in dividends. Here’s how you calculate the tax:
- First gross up (increase) $800 by 44% to $1,152 ($800 x 1.44). This is your grossed-up dividend.
- Calculate the tax on your grossed-up dividend. Let's assume that based on the tax bracket you are in, you have a federal tax rate of 22%, and a provincial tax rate of 9.15%. You would have pay $253 in federal tax ($1,152 x 0.22) and $105 in provincial tax ($1,152 x 0.0915) for a total of $358.
- Claim a dividend tax credit on the grossed-up dividends at a rate of approximately 18%. This reduces your federal tax by $207 ($1,152 x 0.18) to $46 ($253 - $207). It also reduces your provincial tax by $74 ($1,152 x 0.064) to $31 ($105-$74).
The result: Your total tax bill is only $77 on $800 of dividend earnings. You would pay a lot more tax, closer to $250, on $800 earned at your job or on interest.
What taxes will I pay on capital gains from Canadian corporations?
- You pay the least tax on capital gains. Capital gains occur when you sell an investment, like a stock, for more than you paid for it. If you sell for less than you paid, you get a capital loss.
- At tax time, you subtract your losses from your gains. This tells you your net gains.
- You pay tax on only 50%, or half, of your net gains. At least to this small extent, the government gives you a tax break when you take more risk to make money.
Tip: You get an even better break if you donate some securities to a charity: you do not pay tax on any capital gains in these cases.
What taxes will I pay on foreign investments?
- If dividends or capital gains come from investments outside of Canada, they are taxed like income from your job.
- Interest-bearing investments like Certificates of Deposit (CDs) from the United States are also taxed like employment income.
Remember: Taxes can really affect your return on investment
With some smart tax planning, you can reduce the tax you pay now; put off (defer) some tax for later; and invest the money you saved in taxes so it will grow for you.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.