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Try to Earn your Investment Income (outside of RRSPs) at the Lowest Tax Rate Possible
Interest income and dividend income are received or accrued each year, and are taxable in the year you receive or accrue the income. You have no control over which year the income is paid. You are not taxed on capital gains until your investment is sold, so you have some control over which year you receive the income, because you can choose when to sell your investments.
If you have no income other than interest income, you can earn approximately $11,635 in 2017 before any federal tax is payable.
If you have no income other than Canadian dividend income eligible for the enhanced dividend tax credit, you can earn approximately $51,637 in 2017 before any federal tax is payable. However, provincial tax may be payable. For every $100 of these dividends, $138 (grossed-up amount) is included as taxable income (the extra $38 is called the dividend "gross-up"). Then taxes are reduced by the enhanced dividend tax credit, resulting in a low tax rate. See the Dividend Tax Credits page for federal and provincial rates, information on how much can be earned in each province before taxes are payable, and information on the changing gross-up rate. These Canadian dividends are the most tax-efficient, even for a senior who is receiving Old Age Security which gets clawed back due to the gross-up of the dividends, and for whom the age amount is clawed back. You can check this out by using our Investment Income Tax Calculator.
If you have no income other than Canadian non-eligible (regular, or small business) dividends, you can earn approximately $33,314 in 2017 before any federal tax is payable. However, provincial tax may be payable at this level.
If you have no income other than capital gains income, you can earn $27,616 (2x the basic personal amount) in 2021 before any federal tax is payable. The tax paid on capital gains is low, because only 50% of capital gains is taxed, and the gains are not taxed until the investments are sold, except in situations where there is a deemed disposition. A deemed disposition can occur, for example, upon the death of a taxpayer, or when an investment is transferred into an RRSP or TFSA, or if the investment is given as a gift. See Reduce capital gains taxes by donating capital property on our Filing Your Return page.
If you have a capital loss, it can be used to reduce capital gains. Capital losses cannot usually be used to reduce other income. However, capital losses can be carried back up to 3 years to be offset against prior capital gains, and can be carried forward indefinitely. The only time they can be used to reduce other income is in the year of a taxpayer's death, or the immediately preceding year. At this time, 50% of the capital loss would be used to reduce other income. For more on this topic, see the Canada Revenue Agency interpretation bulletin (Archived) IT232R3 - Losses - Their Deductibility in the Loss Year or Other Years (paragraph 30).
Marginal Tax Rates - see provincial/territorial tables of marginal tax rates, which show rates for capital gains, eligible and non-eligible Canadian dividend income, and other income.
Basic Tax Calculator, which shows the taxes payable, as well as the marginal tax rates for capital gains, eligible and non-eligible dividends, and other income such as interest and foreign dividends.
The Canadian Tax & RRSP Savings Calculator is will calculate your taxes payable for each province and territory except Quebec, which has a separate Tax and RRSP Savings Calculator. The online tax calculators can be used to determine your taxes payable for different types of investment income. They will show your total federal and provincial taxes, as well as CPP and EI premiums on different types and amounts of income.
Tax tip: Capital gains and Canadian dividends are the most tax-efficient investments outside of RRSPs.
Revised: October 26, 2023
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