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Investment income and income tax

Registered vs. non-registered savings plans

When you open a registered savings plan, you sign an account agreement with the financial institution. Your institution is then required to register the terms of the agreement with Canada Revenue Agency.

Your financial institution must report all the transactions you make in this account. Amounts deposited and withdrawn are subject to specific restrictions.

RRSPs and RRIFs are the best-known of these plans, offering deferred income tax until the time of withdrawal. An alternative savings plan is the Tax-Free Savings Account (TFSA). In a TFSA, no income tax is due on earned income (interest, dividends and capital gains) as long as the rules governing deposits and withdrawals are followed.

Non-registered saving plans are simply savings accounts. Financial institutions are only obligated to report the income (interest earned) on the account annually. You're free to deposit and withdraw funds at any time.

How income is taxed

Income from investments held in non-registered accounts is taxed at different rates based on whether it comes from interest, dividends or capital gains.

Interest income is taxable annually even if it hasn't been paid out, such as in the case of accrued interest. This rule does not apply to the non-guaranteed portion of market-linked guaranteed investments.

Capital gains, or profits made from the sale of property, are taxed at 50%. This means that only half of the amount gained is taxable.

Example: If you buy a share at $12 and sell it for $20, you'll have a capital gain of $8. Therefore, $4 of the capital gain is taxable.

Dividends are payments made by a company to shareholders based on the proportion of shares they each hold. Dividends are taxable the year in which they are declared and entitle shareholders to a tax credit.

Find out more about the taxable amount of dividends.

Which investments should you hold outside your RRSP?

To answer this question, you have to know how investment income is taxed.

Fixed-income securities (such as term savings and bonds) yield regular interest income, while stock issues generate capital gains and, in somecases, dividends.

Since interest income is more heavily taxed, it is better to keep interest-generating investments in a registered plan like a TFSA or RRSP.

On the other hand, capital gains and dividends are taxed at a lower rate. This means you can hold stock issues outside a registered plan, since the taxes will not greatly reduce your return.

Tools and tips

RRSP 101

Learn the basic rules of a registered retirement savings plan.

Read tip - RRSP 101

TFSA at a glance

Find out how a TSFA works.

Read tip - Understanding TFSAs

RRSP: Don't wait!

The sooner you start contributing, the better!

Read tip - The advantages of making early RRSP contributions

TFSAs in 16 questions

Everything there is to know about TFSAs.

Read tip - Essential questions about TFSAs

Unused RRSP contribution room

If you haven't been contributing your maximum, you can catch up by using your unused contribution room in subsequent years.

Read tip - Using your unused contribution room

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