The Differences Between Interest, Dividends and Capital Gains

Here's brief intro to the difference between Interest, Dividends & Capital Gains.

While investments should not be chosen specifically based on taxes alone, understanding how various forms of investment income is taxed plays a vital role in ones investment portfolio.

There are three basic types of investment income.

• Interest
• Dividends
• Capital Gains

Interest

• Can be received from various types of investments such as Saving Accounts, Guaranteed Income Certificates (GIC's), Bonds and Real Estate Investment Trusts (REITS) to name a few.
• Taxed at your marginal (highest) tax rate
• You will receive a T5 Statement of Investment Income at tax time

Example:  Joe invested in a GIC which that and he earned $10,000 of interest income in his taxable account.  His marginal tax rate is currently 30% which will result in him owing $3,000 back in taxes.

Tax Calculation:

Interest income multiplied by his marginal tax rate

$10,000 x 30% = $3,000.00

Capital Gains

• The profit realized when disposing of an asset such as a stock, bond, real estate and other investment at a higher price than your Adjusted Cost Base (ACB).
• Only 50% of capital gains are taxable (Up to $250,000)
• Taxed at your marginal tax rate
• You will receive a T5008 Statement of Securities Transactions at tax time

Example:  Joe invested in a stock that he originally purchased for $10,000 which then grew to a value of $20,000.  He decided to sell that stock for $20,000.  Joe has a Capital Gain of $10,000 of which only 50% is taxable and the other 50% is tax free.  His Marginal tax rate is currently 30% which will result in him owing $1,500 back in taxes.

Tax Calculation:

Half of the capital gain multiplied by his marginal tax rate

 $5,000 x 30% = $1,500.00

Dividends

• Most commonly received when owning shares of a publicly traded corporation.  Some companies will pay their shareholders a part of a company's earnings in the form of a dividend.
• Taxed at your marginal tax rate
• Federal & Provincial tax credits available to help offset tax
• You will receive a T5 Statement of Investment Income at tax time

Example:  Joe resides in Manitoba and invested in the stock of a company that paid him $10,000 in eligible Canadian dividends.  His Marginal tax rate is currently 30% which will result in him owing $963.27 back in taxes.

Tax Calculation:

Gross up the dividend of $10,000 * 1.38 = 13,800.00

$13,800 * 30% = $4,140.00 in tax

Federal Dividend tax credit of 15.0198% = ($13,800 X .150198) = $2,072.73

Manitoba Dividend tax credit of 8% = ($13,800 x .08) = $1,104

$4,140 - $2,072.73 - $1,104 = $963.27

To Summarize

• $10,000 in Interest = $3,000 taxes for Joe
• $10,000 in Capital Gains = $1,500 taxes for Joe
• $10,000 in Dividends = $963.27 taxes for Joe

The table below shows how Interest, Capital Gains and Canadian Dividends are taxed by Province at the highest marginal tax rate.

If you're looking for a financial advisor I'd love to work with you and help you meet your goals.  I'm always open to chatting and you can book a call with me by clicking the link below.

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Scott Kok, PFP®

More information can be found in this article.  How Investment Income is Taxed

*Information is for general information purposes only

*Calculations based off of investments in Manitoba, Canada