How to Reduce Taxes on Investment Income in Canada

April 02, 2025
How to Reduce Taxes on Investment Income in Canada

Introduction

Investment income—including dividends, capital gains, and interest income—is subject to taxation in Canada. However, with proper tax planning, investors can legally reduce their tax burden, maximize after-tax returns, and grow their wealth more efficiently. The Canada Revenue Agency (CRA) provides various tax-saving opportunities through registered accounts, tax deductions, and strategic asset allocation.

 

This article outlines the best strategies to minimize taxes on investment income in Canada, helping investors keep more of their earnings.

 

1. Use Tax-Advantaged Accounts

a) Tax-Free Savings Account (TFSA)

  • Investment income earned inside a TFSA is completely tax-free, including capital gains, dividends, and interest.
  • There are no taxes on withdrawals, making it ideal for long-term, tax-free growth.
  • 2025 TFSA Contribution Limit: $7,000 (plus unused contribution room from previous years).

b) Registered Retirement Savings Plan (RRSP)

  • Contributions are tax-deductible, reducing taxable income for the contribution year.
  • Investment income grows tax-deferred until withdrawal.
  • Best for high-income earners, as withdrawals in retirement may be taxed at a lower rate.
  • 2025 RRSP Contribution Limit: 18% of earned income (up to $32,490).

c) Registered Education Savings Plan (RESP) & Registered Disability Savings Plan (RDSP)

  • RESP: Investment growth is tax-free until withdrawn for education.
  • RDSP: Contributions grow tax-free, with government matching grants available.

 

2. Prioritize Capital Gains Over Interest Income

  • Only 50% of capital gains are taxable, making them more tax-efficient than interest income, which is fully taxable.
  • Long-term investing in stocks or ETFs helps defer capital gains taxes until the investment is sold.

 

3. Invest in Canadian Dividend-Paying Stocks

  • Eligible Canadian dividends qualify for the Dividend Tax Credit, reducing the effective tax rate.
  • Dividends from foreign stocks are fully taxable and may be subject to foreign withholding taxes.

 

4. Use Tax-Efficient Investments in Non-Registered Accounts

  • Place high-tax investments (bonds, GICs, interest-earning assets) in registered accounts (RRSP, TFSA) to avoid full taxation.
  • Keep capital-gains-focused investments (stocks, ETFs) in taxable accounts to take advantage of lower tax rates.

 

5. Consider Tax-Loss Harvesting

  • Sell losing investments to offset capital gains and reduce taxable income.
  • Unused losses can be carried forward indefinitely to offset future gains.
  • Losses can also be carried back up to three years to reclaim past capital gains taxes paid.

 

6. Use Income Splitting with a Spouse or Family Members

  • Contribute to a Spousal RRSP to shift future taxable income to a lower-income spouse.
  • Gift funds to a lower-income family member’s TFSA to grow investments tax-free.

 

7. Structure Investment Withdrawals Wisely

  • Withdraw from non-registered accounts first to preserve tax-sheltered growth in RRSPs and TFSAs.
  • Withdraw RRSP funds strategically in low-income years to minimize tax impact.

 

8. Claim Carrying Charges and Deductible Expenses

  • Investment-related expenses, such as interest on loans used for investing and investment advisory fees, may be tax-deductible.

 

9. Consider Corporate Investment Strategies (For Business Owners)

  • Holding investments inside a Canadian corporation can allow for tax deferral and efficient income distribution.

 

Conclusion

By leveraging tax-advantaged accounts, dividend tax credits, tax-loss harvesting, and strategic investment withdrawals, Canadian investors can reduce taxes on investment income while maximizing after-tax returns. 

Tax Partners can help individuals and businesses develop customized tax-efficient investment strategies to grow wealth while minimizing tax liability.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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