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
• 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 dividends.  His Marginal tax rate is currently 30% which will result in him owing $1,838.02 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% = ($10,000 X .150198%) = $1,501.98

Manitoba Dividend tax credit of 8% = ($10,000 x .08) = $800

$4,140 - $1,501.98 - $800 = $1,838.02

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 = $1,838.02 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 interested to learn how we can incorporate this into your specific situation you can book a call with me below.

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