Investment Income for Individuals in Canada

Investment income refers to return on your invested capital such as interest, dividend, capital gain and rental income. Individual earning investment income in Canada must report it on their personal income tax return. You will receive tax slips from an investment broker, bank or other investment such as slips from your own corporation or other private corporation. Most common slip reporting investment income are as follows:

1. T5- Statement of Investment Income – Reports most of interest, dividend and certain foreign income. Interest (such as from saving account, GIC, T-bill etc.), eligible and non-eligible dividend and foreign divided gross is reported as income.
2. T3 – Statement of Trust Income Allocation and Designation- Mostly received from mutual funds, EFTs and trust. Capital gain, divided, interest and return of capital is reported from this slip as income.
3. T5008- Statement of Securities Transaction –

When determining whether income earned is business or investment income in Canada, CRA looks at your level of involvement including effort, labor and time invested in generate that income. Tax treatment of various investment income governed by specific rule outlined by Canada Revenue Agency (CRA), which are briefly discussed below.

What is the difference between income from property and income from business?

The Classification of business income and investment income is particularly important for capital gain. Generally, tax on capital gain gets favorable treatment, where only 50% of the gain is included in your taxable income. However, CRA may consider capital gain on investment income as business income, especially if you are actively involved in trading and dealing the securities. In such cases, 100% of the gain earned is included in your taxable income along with other regular income. Therefore, it is crucial to ensure that the classification of investment income is correct from the outset to avoid surprises in the future.

In determining whether income is business or investment income, the CRA uses criteria developed from tax court decisions in similar cases. The CRA does not make a decision based solely on one factor; instead, it considers all relevant criteria together to assess the overall nature of the income-earning activity. Usually, the CRA looks at your primary intention — whether you acquired the asset to use it as inventory or as a capital asset. Additionally, did you intend, at the time of purchase, to sell the property for a profit?

Since intention is a state of mind and not observable. The court used the following behavior to access state of mind. The following are the key criteria used by the CRA in accessing state of mind.

1. The relationship of the transaction to your business- Was your transaction similar to your regular business income earned. For example, a real estate developer who purchases a building for rental purposes may be considered business rather than investment when the later sell the property.
2. Nature of asset- Was it a one-time sale or did multiple transactions occur in the year? A higher volume of similar transactions suggests business activity due to increased involvement. Number and frequency of transactions – was it one time
3. Length of investment period – How long did you leave the investment before selling it? Assets typically held for long-term income are more likely to be considered capital assets.
4. Feasibility of your intention – If your primary intention of investment is frustrated (unreachable), secondary intention (such as resale for profit) may use to begin with.
5. Extent of to which intention was carried out – If little or no effort was made to use the asset as a capital property, this could suggest it was held as inventory, supporting a business classification.

Please contact us if you have any questions or would like a professional assessment of your case.

Why its matter if business or investment income in Canada

Income earned as a business and investment has different tax treatment and affects in other asea as well such as capital gain is taxed on only 50% of gain. See below table for details regarding tax effect on each source of income.

Area	Business income	Investment income
Tax rate	Full tax rate is use	Get favorable treatment for capital gain when you sell investment property at gain.
Canada Pension Plan (CPP)	Required to contribute CPP for both employer and employee over $3,500 of net business income	No requirement for CPP
HST requirement	You must register for HST if your income is more than $30,000	Usually, no requirement of HST
Expenses	Broad range of expenses	Limited to directly related to investment
Capital gain exemption	Available to Qualified Small Business Corporation (QSBC)	No available

 

Most common types of investment income in Canada

There are various types of income that is considered earned through investment. Since this part of your other income, the marginal tax rate is used for investment income as well. Most common investment income and their tax implications are as follows.

1. Interest income – Interest on your saving account, guaranteed investment certificate (GIC), government bonds, mortgages and loans must be reported on your tax return. Inclusion of interest in your tax return depends on anniversary date or the date it is received. The anniversary date is one day before one year after the date of issue. For example, if you loan someone on May 1, year 1, the anniversary date is April 30, year 2. If you do not receive interest in cash on this date, interest income must still be calculated and included in your personal tax return as investment income.

On the other hand, if you receive interest in cash- such as from GIC or other loans- it must be included in your personal tax return if it has not already been reported, regardless of investment date (In this case, anniversary rule does not apply).

You will receive T5 slips showing interest paid to you. You must still report your interest income even though a T5 is not issued to you. However, if you receive interest from your Tax-Free Saving Account (TFSA), it is not taxable and therefore is not included in your personal tax return. Interest earned on RRSP investments is deferred until you withdraw from the account. If you do not expect T5 to be issued to you, you must maintain good records of loan and interest amount (this often happens with private loans).

1. Dividend income – Dividend income refers to money paid to you by corporations when they share their profit with shareholders. If you own shares of Canadian or foreign corporations, you may receive dividends.

The most common types of dividends that you can expect are eligible dividends, non-eligible dividends and foreign dividends.

• Eligible dividends are mostly issued by public corporations (listed on a stock exchange). This type of dividend is taxed at lower rate due to a higher dividend tax credit.
• Non-eligible dividends are issued by small Canadian-Controlled Private Corporations (CCPCs). These dividends are taxed at a higher tax rate due to lower dividend tax credit available.
• Foreign dividends are paid from foreign corporations or non-Canadian corporations. These dividends are taxed at full amounts, and no Canadian dividend tax credit is available. You may have to pay foreign tax on these dividends when issued to you, but foreign tax credit can be claimed for the taxes you paid to the foreign countries.

How dividends are taxed in Canada

Individuals must report actual dividend amount plus a gross-up amount on their personal tax return for the dividends received from Canadian corporation (excluding foreign corporations).

Your grossed-up dividend amount is the taxable dividend, and dividend tax credit is used to offset some of your personal taxes owed on dividend income. The grossed-up dividend is calculated by increasing the actual dividend you received to reflect pre-taxed corporate income used to pay it. The dividend tax credit is then applied to offset approximate tax paid by the corporation on that income. This mechanism is designed to prevent double taxation – once at the corporate level and again at the individual level. T5 shows both actual dividends paid and taxable dividends (grossed-up) amount which is used to report your dividend income.

The gross-up rates are:

• 38% for eligible dividends
• 15% for non-eligible dividends

Example:

• You receive an eligible dividend of $100
• Grossed-up amount = $100 × 1.38 = $138
• You report $138 on your tax return and claim a dividend tax credit to reduce your tax owed

However, dividends received from your Tax-Free Saving Account (TFSA) are not taxable; therefore, you don’t have to include them in your personal tax return. Dividends received in a Registered Retirement Saving Account (RRSP) are deferred until you withdraw the amount from the account.

3. Rental income – Rental income refers to income earned from renting out property that you owned or have the legal right of use, such as a house, apartment buildings, land, vehicle, or equipment. This income primarily comes from renting residential and commercial real estate, but it also includes income from leasing other property such as land, equipment, or vehicles. Rental income must be reported on an annual accrual basis, meaning you must include rental income earned even if it has not yet been collected. For example, if you rented your house from January to December but have not received the December rent, you are still required to report it as rental income.

Most common types of rental income in Canada include

1. 1. Residential properties – Renting house, apartment building, or basement to individuals for personal use (not for business purposes) is considered residential rental income. You do not have to collect HST on this income, regardless of amount, as it is exempt from HST.
   2. Commercial properties – If you rent out your properties for office use, retail, or any other business-related activities, it considered commercial rental income. You must collect HST if your total rental income exceeds $30,000 in a calendar quarter (quarters for a calendar year are March, June, September and December) or over four consecutive quarters, or you are an HST registrant. If you are registered for HST, you must collect HST on commercial rent regardless of income but can also claim HST paid on related expenses.
   3. Vacation properties – This refers to renting out your cottage or using platform like Airbnb for short-term stay. Income received from this type of income must be reported on your income tax return. You also must register for and collect HST if your total income exceeds $30,000 in a 12 month period or you are an HST registrant. You can claim input tax credit (ITCs) for HST paid on eligible expenses such as repair and maintenance, utilities, and supplies. The net HST must be remitted to the CRA. Additionally, some provinces or municipalities have specific taxes or rules for short-term rentals, so you must ensure you comply with all applicable regulations.
   4. Leasing land or other personal properties – You may rent or lease your vacant land or other personal property, such as vehicle or equipment to others for their use. The income collected from this type of rental must be reported on your personal tax return. You can deduct eligible expenses from gross rent you collected. See below for examples of deductible expenses.

What Expenses Can Be Deducted from My Rental Income?

General rule is that any expenses incurred to earn rental income are deductible from your rental income. Most common expenses are as follows.

1. Repair and maintenance

These expenses include amounts paid to maintain in good condition, such as minor repairs (paining, fixing leaks, replacing broken window, etc.). However, renovations that improve the property or extend the useful life are considered capital nature and cannot be deducted as current expenses. Please consult us if you have substantial renovation to determine the proper tax treatment.

2. Advertising

Expenses paid to list your rental properties to any online platform or through signs to attract tenants are deductible.

3. Insurance

Insurance premiums paid during the year are deductible expenses but only to the extent they are related to current year. Insurance paid for future periods (prepaid insurance) is not deductible in current year.

4. Interest and bank charges

If you paid mortgage on your rental properties, only mortgage interests are deductible, but not the principal amount. If you maintain separate bank accounts for rental purposes, only bank fees and any other bank charges associated with those banks are deductible. Similarly, if line of credit is used to finance the rental properties, only interest paid on that line of credit is deductible.

5. Professional fees

This includes legal fees (drafting lease agreement, issuing eviction notice, or collecting overdue rent) as well as accounting and bookkeeping fees you paid. These fees are deductible from your rental income.

6. Management and administration fees

If you hire property management companies to manage your rental properties, such as collecting rent, maintaining properties, handling tenants – those fees are deductible from your rental income. Additionally, if you owned and rented condo or townhouse, management fees paid are also deductible from your rental income for the year.

7. Salary and wages

if you hire a superintendent, cleaner, handyman, or other staff to manage the properties, their wages are deductible. You may also be required to withheld payroll taxes and remit to CRA.

Please contact us if you have questions regarding payroll requirements for your rental property.

8. Travel expenses

If you need to travel to your rental property personally to manage, travel expenses such as vehicle related costs, accommodation, and meals (meals are subject to 50% deductibility) may be claimed from rental income. You need to ensure that no personal expenses are included in the travel deductions.

9. Utilities

Expense paid for hydro, gas, internet, heat, water are deductible to the extent they are not paid by the tenants.

10. Office expenses

Office supplies, postage, and stationery are deductible if they are used for managing your rental properties.

11. Capital Cost Allowance (CCA)

You can claim Capital Cost Allowance (CCA), which is tax depreciation, on buildings, furniture, appliances or any other equipment used in the rental operations. The CRA provides specific CCA rates for each type of capital assets- for example, rental building is typically depreciated at 4% of the declining balance. However, CCA is optional; you can choose not to claim it. However, claiming CCA may trigger a recapture of depreciation (considered income) if you sell the property more than its original cost. Additionally, if you own multiple rental properties with total cost more than $50,000 for each property, each property must be included in separate CCA class. Income and expenses, however, can still be reported together.

Note: Do not claim CCA on your principal residence, as this may result in losing the capital gains exemption when you sell the property.

How Mutual Fund Income Is Taxed in Canada

A mutual fund is an investment pool where money is received from many investors to invest in diversified investment portfolio. Your investment represents small fraction of total portfolio and referred to as a unit. The value of your unit changes based on performance of the overall portfolio. Since it is a portfolio investment, it consists of various assets such as stocks, bonds, money market funds or other securities. Therefore, income received from your units may represent interest, dividends, capital gain, or return of capital, usually referred to as distributions. These distributions must be reported on your personal tax return based on types of income, except for return of capital, which is generally tax free. The most common types of income included in mutual fund distributions are:

1. Interest income – This includes interest from bond or GIC. It is fully taxable at your personal marginal tax rate. T3 or T5 slips are issued by your investment broker for this income.
2. Dividend income – This includes dividends received from Canadian corporation stocks held in the mutual fund pool. A gross-up and dividend tax credit are applied as discussed above when reporting this income on your personal tax return. T3 or T5 slips will be issued for this income.
3. Capital gain – When investments are sold within the mutual fund at a profit, capital gains are realized and distributed to unit holders. In Canada, only 50% of the capital gain is taxable. T3 slips are issued to report this income.
4. Return of capital – This is return of your original investment (after taxed invested amount) and not taxable. However, it reduces your adjusted cost based (ACB) of your investments, which may result in higher capital gain when you sell it.

When you sell your mutual fund units, there may be tax consequences. If you sell your investment for more than your adjusted cost based, capital gain arises, and you must report it on your personal tax return. However, only 50% of the gain is taxable. If you sell your investment at a loss, you can claim capital loss. Capital losses can only be applied against capital gains. If you do not have capital gain in current year, you can carry the loss back up to three years or carry it forward indefinitely.

Important – Some brokers keep track of your adjusted cost based (ACB), but not all do. Therefore, it is your responsibility to keep track of your ACB, especially when reinvestment and return of capital (ROC) are involved. Reinvestment increases your ACB (to avoid double taxation), while return of capital (ROC) reduces it.

Other investment income than you need to consider

• Stock dividend – A stock dividend is a dividend payments made of additional stocks other than cash. This dividend is taxed in the same way as cash dividend as explained above. However, actual dividend received is added to your cost based on the shares which reduces future capital gains when you sell these shares.
• Capital divided – Capital dividends are paid out of a capital gain account from Canadian Controlled Private Corporation (CCPC) and are tax free.
• Royalties – Royalty income refers to money you receive when someone uses your property, idea or natural resources. Tax on royalty income depends on whether it is part of your business or passive investment. Please contact us if you need more information regarding royalty income.

What are common expenses that can be claimed against investment income

1. Interest – If you borrow money to invest in income producing investment such as stocks, mutual funds, bonds, interest paid on borrowed money is deductible.
2. Management or advisory fees – if you paid fees to manage your fund or obtain professional advice such as broker fee, fees paid for someone’s advise are deductible. However, if these fees are related to your investment held in RRSP, TFSA or RESP account are not deductible.
3. Accounting and legal fees – Fees paid to prepare your investment income are deductible. Such as calculating capital gain/loss, investment income ect. If you incur fees to collect your late investment income or enforce payment of dividend/interest are deductible.

Please consult one of our tax specialists if you need more information of issues specific to your situation applies.