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Tax treatment of income from investments in shares of corporations

This information is regarding shares which are held outside of RRSPs or other registered accounts.

When shares in corporations are purchased, the adjusted cost base is the amount paid for the shares, including any commission paid.  When the shares are sold, the adjusted cost base of the shares is deducted from the proceeds of sale (after deducting commission paid on the sale) to determine the capital gain or loss.  Only 50% of capital gains are included in taxable income.  Capital losses cannot usually be deducted from other income.  They can only be used to reduce or eliminate capital gains, except in the year of death.

If shares in one corporation are purchased on different dates, the cost basis of each share is determined on a weighted average basis.  The total cost from all purchases is divided by the total number of shares owned to determine the cost of each share.  If only a portion of the shares are sold, the adjusted cost base of the sold shares is determined by using the average cost base of each share times the number of shares sold.

Superficial loss and other disallowed losses

Income Tax Act s. 53(1)(f), s. 54, s. 251.1(1) IT-456R Capital Property

The superficial loss is added to the adjusted cost base of the repurchased shares.  In some situations, such as when the disposal of the shares is the result of the expiry of an option, a superficial loss is deemed not to have occurred.  For more information see the CRA page What is a superficial loss?

Capital losses can be transferred to a spouse or common-law partner by selling the loss shares, and having your spouse purchase those shares within 30 days.  You are denied the superficial loss, but the loss amount is used to increase the cost basis of your spouse's investment.  Your spouse must  hold the shares for more than 30 days for this to work.

Losses will also be disallowed if shares are transferred to a Registered Retirement Savings Plan (RRSP) or to a Tax Free Savings Account (TFSA) at a loss.  You may decide some reason to make a transfer of a loss investment to this type of account.  If so, when completing your tax return, do not enter this disposal on your Schedule 3, as the loss cannot be claimed.

Tax tip:  If you have sold shares at a loss, do not buy them back within 30 calendar days.

Shares in Canadian corporations

The dividend income received from Canadian corporations gets favorable tax treatment in the form of a dividend tax credit.  This results in much less personal income tax being paid on dividend income than on interest income, or on dividends from foreign corporations.  The amount included in income (starting in 2006) for dividends from large Canadian corporations is 1.45 times the actual amount of dividends received.  The extra amount is called the dividend gross-up.  These dividends are eligible for an enhanced dividend tax credit.

See the combined federal and provincial/territorial tax tables on our Tax Rates and Credits page, which show the marginal tax rates for capital gains, Canadian dividends, and other income.  Our Canadian Tax Calculator is available for each province and territory except Québec, which has a separate calculator.  The tax calculators can be used to compare taxes for different types of investment income.

Tax tip:  Shares in dividend-paying Canadian corporations should be held outside of registered accounts where possible, to take advantage of the favorable tax treatment.

The dividend income must be converted to Canadian dollars to determine the amount to include in your income.  You can convert using the exchange rates on the dates your foreign dividend income is received, or you can use the average annual exchange rate, as published by the Bank of Canada, for all the dividends received in the year.  See our Links page for links to foreign exchange rates.

The adjusted cost base of the foreign shares must be calculated in Canadian dollars.  If foreign funds were used to purchase the shares, the exchange rate on the date of the purchase (trading date, not settlement date) is used to convert to Canadian dollars.

When shares in the foreign corporation are sold, the proceeds are converted to Canadian dollars using the exchange rate on the date of the sale (trading date).

See the 2 examples below using shares purchased in US$:

See also:  Reporting foreign income and expenses

Tax tip:  Shares in dividend-paying foreign corporations are better held inside a registered account.  Shares in non-dividend paying or low dividend paying foreign corporations are better held outside to take advantage of the low tax rate on capital gains.