In Canada, you only pay taxes on investment income when you realize a gain (usually by selling), not simply by owning an investment. However, certain types of investment income like dividends and interest are taxable each year, whether you sell or not. The key distinction is between realized capital gains (taxed when you sell) and annual income distributions (taxed as earned). Understanding this difference helps you plan your portfolio and avoid surprise tax bills. Even if you hold your investments and never sell, you may still owe taxes on the income they generate: - Dividend income: Payments from stocks and dividend-paying funds are taxable in the year received, regardless of whether the stock price went up or down. - Interest income: Interest from bonds, savings accounts, GICs, and bonds is fully taxable as regular income in the year earned. - Capital gains distributions: Some mutual funds and ETFs distribute realized capital gains to unitholders each year, and these are taxable even if you reinvest them. - Foreign investment income: Certain income from foreign sources (like US dividends) may also be taxable in Canada even if you don't sell the underlying investment.
No. Capital appreciation (price increase) is not taxable until you sell the investment. Only realized capital gains trigger a tax bill. This is why it's called an 'unrealized' gain when you still own the investment.
Yes. Dividends are taxable in the year you receive them, regardless of whether you sell the stock or reinvest the dividend. The CRA treats reinvested dividends the same as cash dividends for tax purposes.
Interest is taxed as regular income at your marginal tax rate. Dividends from Canadian corporations receive a tax credit that makes them slightly more tax-efficient. Both are taxable in the year earned, even if you don't withdraw the money.
Yes. Investments in a TFSA generate no taxable income. All dividends, interest, and capital gains grow tax-free, and withdrawals are never taxed. This makes a TFSA one of the most powerful tax shelters available to Canadian investors.
You should report investment income based on what you received or accrued in the tax year, not when the T-slip arrives. Most T-slips arrive by late February, but if you earned income in December, you may need to report it before the T-slip is issued.