How to Reflect Investment Income and Capital Gains/Losses on your Personal Tax Return
Table of Contents
Residents of Canada are required to reflect all sources of worldwide income on their personal tax returns. For most individuals, who have investments with Canadian based banks and brokerages, this is fairly straightforward as you will receive the relevant tax slips, usually by March 31st of the year following the end of the calendar year i.e. for the 2023 tax year, you should receive all investment related tax forms and slips by March 31st, 2024. It is important, if you have investment income in non registered investments (i.e. not TFSA, RRSPs or FHSAs), to ensure that you have received all tax documents and report them. Failure to report income can result in penalties by Revenue Canada and Revenue Quebec, which is never great, particularly when it can be easily avoided. It should be noted that since most tax documentation is submitted by the issuer to Revenue Canada (CRA) and Revenue Quebec (RQ) electronically, they usually have a record of the various types of investment income for each taxpayer and can easily identify any missing information.
Types of Included Investments (Tax Reporting is Required)
Investments held in non registered accounts that are required to be reflected on your tax return such as:
Guaranteed Investment Certificates (GICs)
Treasury bills
Canada savings bonds
Earnings on a life insurance policy
Bonds and bond funds
Stock and mutual funds
Real estate investments (excluding direct real estate holding where rental income less expenses is recorded on Schedule T776)
Partnership investment income
Excluded Investments (Generally no tax Reporting Required )
Investments held in registered accounts that are not required to be reflected on the tax return such as:
RRSPs income is deferred until retirement and as such there is no associated income that should be reported nor any tax slips for this type investment UNLESS there a withdrawal during the year. If you do make a withdrawal during the year, you will receive a T4RSP slip which is to be reported on your tax return.
TFSAs income is exempt from tax and therefore individuals will not receive any tax slips relating to TFSA investments. Note there are fairly steep penalties for overcontribution and therefore it is important to keep careful track of this. Another point to note, for US residents, is that TFSA income is considered taxable in the US for those taxpayers who file both in the US and Canada.
FHSAs where investment income accumulates tax free until you use it purchase your home.
Types of Investment Income
Interest Income
Usually reflected on Box 13 of the T5 slip.
Interest income is earned on a variety of investments. Interest can simply be amounts earned on a savings account with a bank but may also be part of a mutual fund, GIC, bonds, partnerships and life insurance policies.
Eligible Dividends
Boxes 24, 25 and 26 of the T5 Slip.
Eligible dividends are received from corporations who are large enough that they do not qualify for the small business deduction i.e. their corporate tax rate is effectively higher than it is for a small business. Most public companies and some private companies are included. The tax rate on eligible dividends is effectively lower for the taxpayer who is reporting them (as they received a dividend tax credit).
Non Eligible Dividends
Boxes 10, 11 and 12 of the T5 Slip.
Often owners and shareholders will take dividends in lieu of, or in addition to a salary.
Earnings on a Life Insurance Policy
Various boxes on T5 Slip
These are often structured in such a way that holders of the policy receive some type of earnings. The amount to report on your tax return will be reflected on a T5 that is sent to you by the life insurance company.
Foreign Investment Income and Withholding Taxes:
Various boxes T5 or T3
If you have investments outside of Canada, that are not managed by a Canadian brokerage or investment firm, you are responsible for self reporting the income received. Investment income is usually either interest or dividends. In many cases amounts are received after withholding tax has been deducted. Foreign investment income including interest and dividends should be shown on line 12100 of the T1 (personal tax return) along with withholding taxes paid. Note that the foreign income has to be converted to Canadian dollars using the Bank of Canada rate in effect on the date the income was received. Alternatively, the average annual rate can be used if income is received on different dates during the year.
Other non Canadian tax documents include the T1042s. If you are using tax software, you can usually use their search function to determine where to enter this. The foreign tax paid shows up on line 40500 of the tax return.
Capital Gains and Losses:
Tax Slip T5008 (RL18 Quebec)
investment income tax slips and forms
T5 slip (RL3 Quebec) which reflects interest, eligible and non eligible dividends, foreign income, withholding taxes for foreign income and are issued by Canadian corporations and banks
T3 (RL16 Quebec) which reflects similar information to the T5. The difference between a T5 and T3 slip (RL3 and RL16) is that a T5 relates to a corporate entity while a T3 relates to a Trust. The deadline for the issuer (corporation or trust) to file their T5s (and RL3s) is the last day of February while a T3(RL16) has a deadline for March 31st. An error that is sometimes made by taxpayers , in their eagerness to file their taxes (a commendable quality), is that they might not have received their trust (T3) slips. They must then file an amended tax return or receive an assessment by CRA which can potentially result in penalties. As such it is important to ensure that the T3s and RL16s, if applicable, are received before filing the tax return.
T5013 (RL15 Quebec) is the statement of income for a partnership. In some case this form will have interest, dividend and other types on investment income on boxes 128 to 136. All of this can be found on the “instructions for recipient” which should accompany the form and provide details on what each box refers to.
T5008 (RL18 Quebec) is the statement of sale of investments during the year and must be reported on the tax return o Schedule 3 which is the schedule for capital gain and losses. Note that sometimes this slip has minimal information, however, the issuing financial institution will often have an additional report where the specific details are reflected. Also see capital gains and losses section below.
Capital Gains and Losses
A disposal of investments, which are not in the ordinary course of a taxpayers business, would be classified as a capital gain or loss. Capital gains or losses can apply to securities, shares, mutual funds, bonds, rental property, land and other assets. If you have an investment portfolio that supplements your income, where securities are bought or sold on an occasional basis then the income or loss will likely qualify for capital gains or losses treatment. If you trade frequently, eg. day traders or people whose primary source of income is derived from investments, you may have to reflect gains and losses as business income where the full amount of the gain is taxable.
Other than the T5 and T3 which reflect capital gains dividends and capital gains respectively on the slips, the T5008 is the primary tax form which shows that disposal of securities during the taxation year for the purposes of reporting capital gains and losses. This can be a little more complicated as often the T5008 does not show the cost (ACB-adjusted cost base) of the investments. Rather it only shows the proceeds of disposition. Many brokerages will provide a separate schedule that shows both the proceeds, cost, expenses and relevant capital gains for each security, however this is not always the case particularly if you have transferred investments from one brokerage to another. If the cost is not readily available it has to be manually calculated by reviewing the costs of the investments on the date of the purchases. This should be maintained in a spreadsheet for future reference along with backup (investment statements or broker confirmations). If you buy the same investment on more than one occasion at different costs, you would take the weighted average of the costs to determine your adjusted cost base. This is only relevant if you sell a portion of the investment. You must have the cost of the investment to determine the gain, once you sell it.
Once you have determined your capital gain or losses for investments that have been disposed of during the year, you would reflect each sale (disposition) on Schedule 3. You must reflect the proceeds of disposition (how much you sold it for) and the adjusted cost base (the total cost of investments). The difference between the two will determine if you have a capital gain or loss.
Capital losses can only be offset against capital gains. If you do have capital losses, these can be carried back against income from the previous 3 years or they can be carried forward to apply against future capital losses, indefinitely. In other words, a capital loss incurred will reduce taxes that you pay on capital gains either for the previous 3 years or at any time in the future.
Tax rates on capital gains are also based on your tax rate as a taxpayer. However, capital gains income inclusion rate is only 50% of the total gain. Eg. A net gain of $100k (after deducting the cost and expenses) would result in income $50k that would then be taxed at your marginal tax rate is for the year of inclusion. Note that a capital gain can result in an increase in your tax rate so it might make sense to defer a gain to a year where your income from other sources is lower.
Note: The federal budget for 2024 has proposed to change the inclusion rate for capital gains from 50% to 66.67% for gains exceeding $250,000 for individuals. Please see this article for a better understanding of how this works
Only realized gains are considered to be income for tax purposes, which is usually triggered by sale or disposition. A stock that has simply increased in value will not result in a capital gain unless sold or transferred to a third party or due to a “deemed dispositions” which arise under certain circumstances including when you cease to be a resident of Canada or upon death.
Carrying charges
When you have investments with a third party there are associated charges, fees and commissions some of which are deductible while others are not
Deductible Investment Fees (Carrying charges)
Investment fees include those paid by you, the taxpayer, to your investment advisor and/or broker to manage your investments
In some cases fees paid for investment advice are also deductible.
Interest paid on funds borrowed to earn investment income and dividends.
NON Deductible Investment Fees/Interest Expense
Any investment fees paid to advisors and brokers that relate to a registered account such as an RRSP, RRIF and TFSA are not deductible (since the income from these accounts is not taxable)
Interest paid on funds borrowed to invest in RRSPs, RRIFs and TFSAs is not deductible
Trading commissions and brokerage fees paid that are associated with buying and selling investments including stocks, bonds, ETFs and mutual funds are not deductible
Fees for safety deposit boxes are not deductible
Fees paid from the returns of your portfolio are not deductible including those reflected in the management expense ratio (MER). There has been some confusion over this recently since there is a requirement that all fees relating to an investment portfolio be reflected on your investment statement of account at the end of the year for transparency. However, only a portion of these fees are actually deductible as discussed above.
For additional information, see CRA’s guidance on carrying charges.
other points to consider
Most tax software will allow you to go through an interview process or provide you with a section where you enter the information from each slip. Once this is entered, the software will automatically allocate it to the correct schedule which is primarily schedule 3 - capital gains and losses and schedule 4 - investment income
Revenue Quebec has an equivalent tax slip and/or form for each CRA slip/form. A useful list of CRA-RQ equivalent slips can be found on the DRTax website
Tax rates on investment income are based on your marginal tax rate as a taxpayer. There is no fixed investment tax rate for individual (non corporate) taxpayers.
For taxpayers with foreign investments it is essential to determine if the total of these investments exceed $100,000 CAD. If this is the case you are required to complete a T1135 which is purely for informational purposes. Failure to submit this form by the deadline can result in significant interest and penalties.
Carrying charges i.e. investment fees paid by the client to your investment advisor and/or broker to manage your investments or certain investment advice are deductible.
Generally, you are not required to pay tax on sale of your principal residence (assuming you are not in the business of flipping). However, you are required to report the details of the sale on Schedule 3 of your tax return (most tax software will have a form that you can complete). If you do not report this, CRA might require that you pay tax on the sale.
When doing your tax return it is important to have an understanding of your investments and potential tax arising from any income received. If you have received income, bought or sold something during the year, there is a good chance that there are tax implications that I recommend doing some research on to ensure that you are onside.
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