Investment Taxation in Canada

The investments in Canada are taxed under Capital Gains Taxation (CGT), as in, if the purchase price of the investments is less than the sale price, it is a capital gain. 50% of the profits are added to your assessable income and is taxed at your marginal tax rate. If the purchase price of the asset is higher than the sale price, it is a capital loss and the losses are offset against the gains before adding the gains to the assessable income.

What investments are tax free in Canada?

The major tax shelters in Canada are the registered investment accounts that are listed below:

Tax-Free Savings Account (TFSA):

The amounts that you contribute to a TFSA are not tax-deductible. However, the earnings within a TFSA – interest, income returns, and capital gains are all tax free for lifetime, even after withdrawal.

Registered Retirement Savings Plan (RRSP):

The amounts you contribute to RRSP can be claimed as a deduction in your tax returns. The earnings within a RRSP – interest, income returns, and capital gains are all tax free until they are within the RRSP. However, when they are withdrawn from the RRSP the accumulated income is taxed at your marginal tax rate.

Registered Educational Savings Plan (RESP):

The earnings within a RESP – interest, income returns, and capital gains are all tax free until they are within the RESP. However, when they are withdrawn from the RESP the accumulated income is taxed at your marginal tax rate. In addition, you cannot claim tax deduction on the amounts you contribute to a RESP.

Tax-Free Investments in Canada

You can invest in various financial instruments within a TFSA – shares, bonds, Exchange Traded Funds, managed funds, Guaranteed Investment Certificates etc. The earnings from these assets are all tax-free within a TFSA, RRSP and RESP. The investments are not tax-free when they are held or traded outside of registered investment plans of Canada.