Stocks, Bonds etc. -> Investing Tax Issues -> Shares in corporations
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.
Income Tax Act s. 53(1)(f), s. 54, s. 251.1(1) IT-456R Capital Property (Archived)
If shares (or other capital properties) are disposed of at a loss, this is considered a superficial loss and may not be deducted as a capital loss if:
A person affiliated with you includes, but is not limited to:
The superficial loss is added to the adjusted cost base of the repurchased or substitute shares. When the repurchased or substitute shares are sold, the loss can be claimed. 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.
If shares are disposed of at a loss inside your TFSA, there will be no superficial loss if the shares are repurchased within the TFSA within 30 days, as gains and losses in a TFSA are not taxable or deductible. If shares in your TFSA are in a loss position and you transfer them out of the TFSA to a non-registered account, superficial loss rules have no effect on this transaction. The market value at the time of the transfer will be the ACB of the shares in your non-registered account.
For more information see the Canada Revenue Agency (CRA) page What is a superficial loss?
In some situations, losses may not be considered a superficial loss. See the CRA information on non-superficial losses.
Tax Tip: If you have sold shares at a loss, do not buy them back within 30 calendar days before or after the disposal (really a 60-day rule).
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 (before or after you sell the shares). You are denied the superficial loss (see above), 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 after your disposition 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 you have a good 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.
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 (for 2012 and later years) for dividends from large Canadian corporations is 1.38 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 Quebec, 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.
Income Tax Act s. 90(1)
Canadian residents who invest in shares which are traded on U.S. stock exchanges are not required to file a U.S. income tax return because of these investments, unless there is some other reason (e.g., U.S. citizen) for filing a U.S. income tax return. All income and capital gains from the foreign shares will be reported on your Canadian income tax return. There will be withholding tax deducted from the foreign dividends at the time they are paid, which you can at least partially recover by claiming a foreign non-business tax credit when you file your tax return. If the shares are in a registered account such as an RRSP or RRIF, there is often no withholding tax. When the foreign shares are in a TFSA, withholding tax will be deducted, and cannot be recovered. See our information on this in the article on which investments should be held inside vs outside an RRSP. US estate tax may be payable by Canadian residents on US assets owned at the time of death, including shares in US corporations.
The dividend income received from foreign corporations does not qualify for a dividend tax credit, so tax is paid on 100% of the dividend (before deduction of withholding tax), when you file your Canadian tax return.
Distributions made by foreign non-resident corporations to Canadian shareholders are normally considered foreign dividends, 100% taxable. When distributions from US shares are categorized as capital gains or return of capital for US taxpayers, they will still be considered fully taxable to Canadian taxpayers. See the 2012 Tax Court Case Schmidt v. The Queen regarding return of capital. However, in this case the decision was based on the taxpayer not providing documentation for his position. S. 90(1) of the Income Tax Act (ITA) provides that the amount of a dividend received from a non-resident corporation is to be included in income. In order for a distribution from a non-resident corporation to be considered a return of capital for Canadian tax purposes, and thus reduce ACB under s. 53(2)(b)(ii) of the ITA, the distribution would have to be considered a return of capital under corporate tax law and not US tax law. See Tax Interpretation 9711965 from 1997. This would also apply to foreign (non-resident) mutual funds or exchange traded funds. There is an exception in some cases when the non-resident corporation is a "foreign affiliate" of the Canadian taxpayer. One of the criteria for a foreign affiliate is that the Canadian taxpayer owns at least 1% of the equity of the non-resident corporation.
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. Whichever method you use should be used consistently.
IT95R Foreign Exchange Gains and Losses (Archived) says "Transactions on income account are normally recorded in a taxpayer's accounts in the Canadian dollar equivalent determined according to the rate of the exchange prevailing at the time of the transaction." However, it does not address capital transactions. CRA has now addressed the question of the exchange rate to be used for capital transactions.
The adjusted cost base of purchased foreign shares must be calculated in Canadian dollars. If Canadian funds were transferred to pay for the purchase, use the exchange rate charged in the transfer. If foreign funds were used to purchase or sell shares, CRA now indicates that the exchange rate on the settlement date should be used to convert to Canadian dollars.
In October 2015 at a Roundtable on Taxation of Financial Strategies and Financial Instruments, as per document 2015-0588981C6 (pdf), the question of foreign exchange transactions was discussed, including whether the exchange rate to be used should be the one on the transaction date (trade date) or the settlement date. CRA responded that the Bank of Canada exchange rate for the settlement date should be used. However, if you transfer funds from a Canadian account to a US account to cover the purchase, the rate at which the funds were actually converted can be used as the exchange rate. This rate is determined and applied on the trade date.
What does the Income Tax Act say about the exchange rate?
S. 261(2) of the Income Tax Act states, re Canadian currency requirement:
(2) In determining the Canadian tax results of a taxpayer for a particular taxation year,
The question is: Did the "particular amount" arise on the trade date or on the settlement date? Only a court case decision could provide the answer. We have not been able to find a relevant court case.
See the 2 examples below using shares purchased in US$, converted to Cdn$:
Canada Revenue Agency (CRA)Resources
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.
Revised: May 22, 2020
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