Whether it’s tax time or not, taxes are often on the minds of Canadians. When it comes to our investments, this is also true. And while some accounts offer tax-free returns (TFSA), not all investment returns are taxed the same. Understanding how your investments are taxed can help you keep more of your hard-earned money in your pocket.
In Canada, there are 2 main account types Canadians can invest in: registered accounts (such as the RRSP and TFSA) and non-registered accounts (also known as cash or margin accounts).
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Taxation of Registered Accounts
When it comes to how your investment returns are taxed within your registered accounts, it depends on the actual account. Some accounts have the benefit of being tax-deferred, and some have the added benefit of having tax-free withdrawals.
Let’s look at five of the main types of registered accounts in Canada.
RRSP
Contributions to your Registered Retirement Savings Plan (RRSP) are made with pre-tax dollars, meaning the government has yet to receive tax on those funds.
When you contribute to your RRSP, you will receive an equal amount of tax deduction. This is why you may get a tax return if you make an RRSP contribution with money that has already been taxed. The government is giving you the tax back as your tax return.
Once the funds are within your RRSP, they grow tax-deferred, meaning there is no ongoing tax drag with those funds.
But when it’s time to withdraw from your RRSP, every dollar you withdraw is treated as income and will be taxed at your marginal tax rate. The more you withdraw from your RRSP in any given year, the higher your marginal tax rate may be.
It is important to note that if you convert your RRSP to a RRIF, there will be no withholding tax on the annual minimum payments required from your RRIF. But that doesn’t mean those funds are tax-free. It just means you will have to pay tax on them when you file your tax return. You can also ask your financial institution to withhold tax on your withdrawals.
If you withdraw directly from an RRSP, your withdrawals will be subject to a withholding tax (see below). That doesn’t mean you will owe more tax on those funds. It just means the government wants its tax money in advance. When you file your tax return, if it’s determined that too much withholding tax was withheld, you will get the balance owed to you as a tax refund.
| RRSP Withdrawal | Quebec Withholding Tax | All Other Provinces Withholding Tax |
| <$5000 | 19% | 10% |
| $5001 – $15,000 | 24% | 20% |
| >$15,001 | 29% | 30% |
TFSA
Contributions to your Tax-Free Savings Account (TFSA) are made with after-tax dollars, meaning the government has already received the tax on those funds.
Once the funds are in your TFSA, they grow tax-free. Meaning, there is no tax on any gains within the TFSA.
This can be a very powerful account if the funds are invested within the TFSA. The more you can grow the funds within your TFSA, the more you will benefit from the tax-free withdrawals.
Unfortunately, according to a 2025 TD Survey, 41% of millennials and Gen Z are not investing the funds within their TFSA.
FHSA
The First Home Savings Account (FHSA) is a magical hybrid account between the RRSP and TFSA.
Contributions to your FHSA are made with pre-tax dollars (similar to an RRSP), but withdrawals from a FHSA are tax-free (similar to a TFSA).
Now, there are specific rules around the FHSA to consider, which are beyond the scope of this article.
RESP
Contributions to a Registered Education Savings Plan (RESP) are made with after-tax dollars (similar to the TFSA), meaning you will not get a tax deduction for your contributions.
Growth of the funds within an RESP is tax-deferred.
Withdrawals of an RESP of the original contribution are tax-free (the withdrawal is a return of capital). Withdrawals of any grants, bonds, and investment gains are taxed to the beneficiary (the student). This is beneficial, as the beneficiary is often in a lower marginal tax bracket than the original subscriber (contributor). The RESP is a way to income split with the beneficiary.
RDSP
The Registered Disability Savings Plan (RDSP) is very similar from a tax perspective to the RESP. Contributions are made with after-tax dollars, and growth within the account is tax-deferred.
Withdrawals from an RDSP of the original contribution are tax-free (the withdrawal is a return of capital). And withdrawals of any grants, bonds, and investment gains are taxed to the beneficiary of the account at their marginal tax rate.
Taxation of Registered Accounts Recap
| Account | Contributions | Growth | Withdrawals |
| RRSP | Pre-tax dollars | Tax-deferred | Taxed at the marginal tax rate |
| TFSA | Post-tax dollars | Tax-deferred | Tax-free |
| FHSA | Pre-tax dollars | Tax-deferred | Tax-free |
| RESP | Post-tax dollars | Tax-deferred | Taxed at the marginal tax rate of the beneficiary |
| RDSP | Post-tax dollars | Tax-deferred | Taxed at the marginal tax rate of the beneficiary |
Taxation of Non-Registered Accounts
Contributions to a non-registered account receive no special tax treatment – they are all with post-tax dollars. But that doesn’t mean that all investment gains are taxed the same. While investing within a non-registered account can provide flexibility, it’s important to note how your returns will be taxed.
Interest
Interest earned within your non-registered accounts is taxed at your marginal tax rate. This means if you have your investments in GICs (guaranteed income certificates) or money market funds, anything you earn from them is subject to tax as if you made it as employment income.
You will also have to report this income annually (you will receive a T3 or T5 slip for your income taxes).
So, while investing in interest-bearing products can be a great way to preserve capital, they do have an ongoing tax drag on your returns.
Let’s look at an example.
Let’s assume you are in Alberta and have an income of $100,000. If you earn an extra $10,000 in interest, you will pay $3050 in taxes and earn a net $6950. Doesn’t seem terrible, but keep reading to find out how you can keep more money in your pocket.
Dividends
Dividends are where it gets a bit complicated tax-wise. Not all dividends are taxed the same. And what you are invested in that provides the dividend will dictate how that dividend is taxed.
Dividends are often paid annually, quarterly, or monthly. You will owe taxes annually on all dividends paid. So, while dividends may have a favourable tax treatment, they also have an ongoing tax drag on your account.
Eligible Dividends
The most favourable tax treatment for dividends is if you invest in Canadian companies that provide an eligible dividend, for example, Royal Bank or Enbridge. Dividends from these companies are grossed up, but then you receive a dividend tax credit. This is to prevent double taxation of the dividend/company profit funds.
Going back to the example above, if you earn an extra $10,000 in eligible dividends, you would pay $1016 in taxes and earn a net $8984.
Non-Eligible Dividends
But not all Canadian dividends are eligible dividends. You will be taxed slightly higher (due to lower dividend tax credit) if you earn Canadian non-eligible dividends. These companies are often private small businesses that benefit from the small business tax deduction.
Going back to our original example, if you earn an extra $10,000 in non-eligible dividends, you would pay $2218 in taxes and earn a net $7782.
Foreign Dividends
And there is a third type of dividend, foreign dividends. If you invest in non-Canadian companies that pay a dividend, then those funds will be taxed as foreign dividends, which are taxed as income (at your marginal tax rate). So, if you were to invest in something like Apple, any dividend you would receive would be taxed at your marginal tax rate.
And to add to the complexity of dividend taxes, those dividends would also be subject to a 15% withholding tax within your non-registered account. You can claim a tax credit for this withholding tax to prevent you from being doubly taxed.
So, back to our example above, if you earn an extra $10,000 in foreign dividends, you would owe a total of $3050 in tax (some as a withholding tax and some directly to the CRA), and you would earn a net $6950.
Capital Gains
Capital gains are the last type of income you can earn on your investments and one that provides the greatest flexibility regarding taxation.
Capital gains are paid on the difference between the purchase price and the sale price (if you were to sell for a loss, you may be able to claim a capital loss). Let’s call that difference the profit.
The benefit of capital gains is that you only pay tax on half of the profit. This is what it means if you’ve ever heard that capital gains have a 50% inclusion rate. That half of the profit that is taxable will be taxed at your marginal tax rate.
One last time, back to our original example. If you earn an extra $10,000 in capital gains (only half would be taxable), you would owe $1525 in taxes and earn a net $8475.
But here’s the added flexibility of capital gains. You can choose when to claim them. You don’t have to pay capital gains until you sell your holdings. So, while you may have a large unrealized capital gain (a security you purchased has increased substantially, but you have yet to sell it), you won’t owe any tax until you realize that capital gain by selling the security.
There is no ongoing tax drag with capital gains.
You may also be able to offset capital gains with capital losses (selling a security for less than you paid for it).
Taxes on Non-Registered Investment Returns Recap
| Taxes Paid | Net Earnings | |
| Interest | $3050 | $6950 |
| Eligible Dividends | $1016 | $8984 |
| Non-Eligible Dividends | $2218 | $7782 |
| Foreign Dividends | $3050 | $6950 |
| Capital Gains | $1525 | $8475 |
Final Thoughts
While I don’t believe you should let the tax tail wag the dog, it is important to note how your investments are taxed. With a bit of planning, you can keep more of your money in your pocket.
Just don’t let future taxes keep you from investing. In all of the examples of the scenario above, every single one ended in a net profit for the investor.