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Are there different tax rates depending on what kind of investment income I have?

Yes. Dividend income from taxable Canadian corporations (but not foreign corporations) is subject to less tax than interest income and marginally less tax than capital gains income. The tax break on dividends is an incentive used by the federal government to encourage investment in Canadian companies.

Here's how different investments are taxed:


Interest income is fully taxable. This means that if you are in the 40 per cent tax bracket, $40 of every $100 of interest income you earn will go to Revenue Canada and you keep $60. There is no particular tax break. In the case of GICs, you pay tax on the interest you earn annually even though you might not actually get paid that interest for a number of years.

Capital gains

Capital gains do come with a tax break. Only half (50 per cent) of a capital gain is taxed. So if you bought a stock for $100 and sold it for $200, only $50 -- not $100 -- of your capital gain would be taxed. If you are in the 40 per cent tax bracket, you will pay $20 of tax and keep $80.


Dividend income from taxable Canadian corporations is taxed at a lower rate than interest income. To determine the taxable amount, dividends are first "grossed up" by 25 per cent That means $100 in dividend income becomes $125 of taxable income. But the government also gives investors a dividend tax credit equal to 13.33 per cent of that $125 taxable amount. Assuming a 40 per cent tax bracket, you would pay about $25 in tax and keep $75. If you own stock which earns dividends, even if you reinvest those dividends into more stock without actually first taking the dividends as cash, you will still be taxed on those dividends.