When building a portfolio that generates income, Canadian investors often weigh the benefits of dividend-paying investments, interest-bearing assets, and capital gain opportunities. While all three can contribute to overall returns, their tax treatment, growth potential, and strategic advantages differ significantly.
What is interest income?
Interest income is earned from fixed-income investments such as:
- Guaranteed Investment Certificates (GICs)
- Bonds
- High-interest savings accounts
Interest income is taxed at the investor’s full marginal tax rate, making it the least tax-efficient form of investment income in non-registered accounts.
Despite its tax inefficiency, interest income has its place. It offers predictable returns, ideal for conservative investors or short-term goals.
Example: John earns $1,000 in interest from a GIC. At a 30% tax rate, he owes $300 in taxes.
What is dividend income?
Dividend income is earned when publicly traded companies distribute a portion of their profits to shareholders. These dividend payments can be made monthly, quarterly, semi-annually or annually, depending on the company.
Your dividends are taxed differently depending on whether they are eligible or noneligible.
Eligible Dividends
- An eligible dividend is a type of dividend that Canadian corporations can pay to shareholders, which qualifies for a preferential tax treatment under Canadian tax law.
- It is paid by Canadian public or private corporations from income that have already been taxed at the general corporate tax rate.
- These dividends are “grossed up” by 38% to reflect the tax already paid by the corporation. This means the amount added to your taxable income is higher than the actual dividend received.
- After gross-up, a federal dividend tax credit is applied to reduce your personal tax liability, so you ultimately pay less tax than you would on a non-eligible dividend.
- Your T5 slip will show you if it is an eligible dividend.
Non-eligible dividends
- Typically paid by small businesses from income taxed at the lower small business tax rate.
- These are grossed up by 15%, reflecting the lower corporate tax paid.
- A smaller dividend tax credit is applied, but it still helps reduce the overall tax burden.
Important Notes
- Foreign dividends do not qualify for the dividend tax credit.
- The dividend tax credit varies by province, so your location affects how much tax you save.
Example: John receives $1,000 in eligible dividends:
- Grossed up: $1,000 × 1.38 = $1,380
- Tax owed: $1,380 × 30% = $414
- Tax credit: $1,380 × 15% = $207
- Final tax: $414 – $207 = $207
What are capital gains?
Capital gains refer to the profit made from selling a capital asset such as a stock, bond, real estate and other investment for more than its original purchase price, also known as its adjusted cost base (ACB).
As of 2025, the capital gains inclusion rate is 50%, meaning:
- Only half of your capital gain is added to your taxable income.
- That amount is then taxed at your marginal income tax rate (federal + provincial).
Example: John sells a stock for $30,000, originally bought for $15,000.
- Capital gain: $15,000
- Taxable portion: $15,000 × 50% = $7,500
- Tax owed: $7,500 × 30% = $2,250
Final thoughts
Keep in mind that dividend, interest, and capital gains income can grow tax-deferred in an RRSP or tax-free in a TFSA. These registered accounts offer powerful tools for maximizing your investment returns while minimizing your tax burden.
For Canadian investors focused on tax-efficient income, dividend-paying investments often deliver greater long-term value. However, the most effective strategy considers your risk tolerance, investment timeline, and account type.
At Rothenberg Wealth Management, we’re here to help you build a portfolio that aligns with your financial goals and optimizes your after-tax returns. A balanced approach that incorporates all three income types, dividends, interest, and capital gains, can help optimize your portfolio for both growth and tax efficiency.
Want to see how different types of investment income are taxed?
Try our Taxes and Investment Income Calculator for a quick comparison: Taxes & Investment Income – Rothenberg Wealth Management
