Young Canadian Investor #32 – A Quick Primer on How Investments are Taxed

I know, it’s taxes, we’ll keep it brief. The following only applies to taxable investment accounts, i.e. not a registered investment account like a TFSA, RESP or RRSP.

Capital Gains and Capital Losses

Say you own $2000 of Apple stock and it grows to $5000 over the course of three years, at which point you sell it. In Canada, the government will only tax you on half of your $3000 gain, meaning $1500 is added to your taxable income the year you sell the stock.

If the $2000 tanks down to $1000 after three years, and you sell it because you need the money, you can use your $1000 loss to lower taxable gains on other stocks you’re selling that year. If you happen to be selling another stock at a $2000 gain, you’d be taxed on $1000, which nets out to $0 when you apply your $1000 capital loss on the Apple stock.

Capital losses can also be applied going back three years and carried forward indefinitely if unused.

Dividends

Sometimes a stock, like Apple, for example, will throw a little cash your way every three or six months called a dividend. It’s an age-old way of rewarding shareholders or fund holders for hanging on. That dividend, as far as the Canadian government is concerned, is taxed as follows:

Suppose you receive $20 from Apple dividends by the end of the year. Inflate that $20 by 38%, which comes to $27.60, and that’s what you report on your taxable income. But wait, the government offers shareholders a credit on most dividends that offsets that number somewhat. The credit works out to 15.0198% of $27.60, which equals $4.145, lowering your taxable dividend to $23.455.

Interest

If you own bonds or a bond fund, they’ll pay you interest, usually monthly, which is taxable as income the year it’s received. That means you add the interest to the rest of your income, say, from your job, when reporting it for your taxes.

That’s it. Hope it helps. Especially if you’re a new investor who may have invested in a taxable account without meaning to amidst all the market enthusiasm.

There are 31 past articles in this series you can peruse.

I also have a step-by-step instructional guide to index investing.

As always, feel free to drop any investing questions in the comments.

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal financial situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.