Investing is something that everyone should know about.

Let me repeat that, investing is something that everyone should know about.

To be clear, you don’t need to be an expert at investing. You don’t need to watch the markets closely. You need to know when to invest, understand how you feel about investing, and what professionals and tools can help.

As an accounting firm, we are not specialists in investing, but we can tell you some of the tools at your disposal, and how your investment income will be treated.

Registered Accounts

This is the first place you should invest. If you’re eligible, your First Home Savings Account (FHSA) should be your priority. After that, RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts) are good places to invest as well. Which is best for you will depend on your circumstances.

We’ll discuss the main pros and cons of the different types of registered accounts but for the purposes of this article, we will focus on taxable investments – those in non-registered investment accounts.

Non-Registered Investment Accounts

Non-registered investment accounts are accounts that are not registered with the government.  

Registered accounts include the FHSA, RRSP, TFSA, and several others (RESP, RDSP, etc.)  We’re only going to focus on the main ones today.

FHSA

The First Home Savings Account is designed to make homeownership more attainable for people who haven’t already bought their first home.

Once you open the account, you can contribute up to $8,000 each year for 5 years. You can carry forward up to $8,000 per year to the next calendar year. Note that this is a big difference from the RRSP or TFSA, where you can carry-forward all of your unused contribution room.  With the FHSA, your contribution room expires if it isn’t used. This is probably one of the biggest cons to the FHSA.

Contributions to your FHSA are deducted from your income, just like an RRSP. In the short term, this means you can get a good reduction of the taxes you’d otherwise pay. Depending on your situation, this could mean a bigger tax refund or paying less tax. Win number one.

Investment income in the FHSA is tax-free, similar to a TFSA. Win number two.

When you withdraw the funds, you must use them to buy your first home, or you’ll pay tax on the withdrawal – similar to if you withdrew funds from your RRSP. It’s important to note that your principal residence, the home you live in, is NOT subject to capital gains tax. This means that when you sell your home, you don’t pay capital gains taxes! Win number 3.

If, for some reason, you can’t buy a home with the funds, you can transfer them to your RRSP without impacting your RRSP deduction limit. This has to be done within 15 years of opening your FHSA.

You’ve already deducted the contribution you made to your FHSA, so you don’t get another deduction when moving the funds to your RRSP – that would be double-dipping.  

However, making this transfer without having to withdraw the funds and pay tax and without impacting your RRSP limit are both huge wins.

You might be able to tell I really support this program.

TFSA

The Tax-Free Savings Account allows you to earn investment income without ever paying tax on it. This is by far the biggest pro of the TFSA.

Unfortunately, the contributions you make to your TFSA are with after-tax dollars.  In other words, you don’t get a tax deduction like you would with an RRSP or FHSA. This is the biggest con to this program.

I’ve seen people grow their TFSAs to many hundreds of thousands of dollars – and not pay any tax on the investment income. It’s definitely a very powerful investment vehicle.

RRSP

Registered Retirement Savings Plans (RRSPs) are the most well-known registered investment programs. Your contributions are deducted from your income, resulting in less taxable income.  As mentioned above, this can create a larger refund, or result in less taxes owing. This is one of the biggest pros of the RRSP.

However, when you withdraw your RRSP funds, they are taxed at whatever your personal tax rate is. This means that the earnings within your RRSP are not tax-free; they are tax-deferred.

There are a couple of other programs that make RRSPs attractive. We won’t discuss them in detail in this article, but they are the Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP).  Under both plans, you can borrow from your RRSP to engage in certain activities like going back to school or buying your first home.

Some Common Negative Elements

There are a couple of cons that each of the registered plans share.

First, you don’t get to deduct any expenses. If you have non-registered investments, you can deduct carrying charges such as:

• Accounting fees
• Interest paid on money borrowed to invest
• Custodian fees
• Management fees and other transaction costs

Another major con is that you can’t take advantage of any credits from losses. If you sell a security (think stock or bond) at a loss in a non-registered account, you can claim the loss against your income. You don’t get to do that in registered accounts.

It’s also important to note that in the RRSP tax-deferral program, you pay tax based on your personal tax rate when funds are withdrawn. Since only half of your capital gains are taxed at your personal tax rate, you could be paying more tax than absolutely necessary.

Note that it would take very specific circumstances and calculations to determine whether opportunities are being missed and how much extra tax is being paid – everyone’s situation is different.

The Main Point

Registered programs provide A LOT of opportunities to save and/or defer taxes. If you haven’t maxed out these accounts, it should probably be your first goal. It is important to get professional advice about this before automatically assuming that your main goal should be to max out these programs. Speak with your financial planner or accountant to get more specific information about your specific situation. RRSPs are not right for everyone.

Types of Investments

We’re going to break down the different types of investments you’ll likely see or consider, the tax slips you’ll probably get, and how investment income is treated for tax purposes. Remember, these are for non-registered investments.

Note that we are trying to keep things very simple, so there are times when you might receive a different type of slip relating to your investment income from what we’ve described. For instance, you may receive a T5 showing interest income or a T3 showing income that is not from interest.

Trading Income

Trading stocks, bonds, derivatives, puts and calls, and other securities can result in capital gains or capital losses.

For simplicity’s sake, we’re going to assume you bought and sold some stock. Your capital gain is essentially the money you receive when you sell the stock minus the amount you paid for the stock.

If this amount is negative, you’ve incurred a capital loss. A capital loss can be used against capital gains in the current year, carried forward into the future, or carried backward for a limited period. When you sell your stock, a T5008 will be issued.

T5008

Every time you make a trade, your financial institution will generate and send CRA a T5008.  This means that if you make 1,000 trades, CRA will get 1,000 T5008 slips. Often, you’ll only receive a single slip from the financial institution, but that slip may represent the 1,000 provided to the CRA. It’s vital that you reconcile your records with the T5008s CRA provided.

A Word of Caution

There is a long history of financial institutions making mistakes on these slips. You must keep track of your investments, especially how much you paid for them.

In the Canadian tax system, the onus of proof is on the taxpayer. Every year, we encounter slips that indicate the proceeds from sale but show the cost at $0. Though possible, more often than not, these are mistakes.

These mistakes can happen for a variety of reasons, but in the end, you must review the information CRA has on file, the slip you were provided, and your independent records.

Last year, we found mistakes for one active trader that resulted in over $180,000 of unjustifiable taxes payable.

The year before, we found a slip showing $114,000 in proceeds with a cost of $0, which was wrong. This would have resulted in $26,000 in taxes when, in reality, the client had lost money on the investment.

It is very important to keep track of your trades!

Capital Gains Tax

The capital gains inclusion rate has been big news in 2024 and leading into 2025. There were proposed increases in the capital gain inclusion rate that would have resulted in significantly higher taxes for those impacted.

Since the government is currently prorogued and the leading candidates for most parties have indicated they won’t support the change – and since it typically impacts those who are more wealthy – we’re going to keep things simple for this article.

Only half of your capital gains are included in income. Then, that income is taxed at your personal tax rate. That’s right, half of your capital gains are not taxed! (The proposed legislation changes were to raise the capital gains inclusion rate to two-thirds for gains above $250,000 by an individual.)

Other types of transactions can result in capital gains tax. For instance, selling the family cottage, selling a rental property, or selling a cryptocurrency or other blockchain-based digital asset can result in capital gains. These need to be reported on Schedule 3 of your personal tax return.

Interest

Interest is typically earned on cash balances and on bonds. Although more stable and often guaranteed, you’re losing the potential upside you might get with other investments.

Interest-generating investments should be in the conservative section of a diversified investment portfolio. Often, you’ll receive a T3 from your financial institution outlining your interest earned.

T3

A T3 is a Statement of Trust Income Allocations and Designations. A fancy way of saying that the T3 shows your cut.

Trusts hold and invest property for beneficiaries. They have to file a T3 with the CRA and issue T3s to the beneficiaries who are receiving the funds (no, that isn’t at all confusing…).

Reporting your interest income is usually fairly straightforward.  Interest income is added to your personal income and taxed at your regular rate.

Mutual Funds and Other Tools

Mutual funds and stocks produce dividends. Often, dividends received within mutual funds are immediately reinvested into the mutual fund.

This means that you may receive dividend income and have to pay tax on it without having received the cash. Dividends are reported on T5s.

Other tools, such as partnerships, can be used to defer investment income or as part of a more advanced investment strategy. Your share of the income (or loss) is reported on a  T5013.

T5

A T5 is a Statement of Investment Income. Income from a T5 is added to your personal income and taxed at your personal tax rate.

Since dividend income comes from a corporation that has already paid tax, dividends are accompanied by a tax credit designed to offset the corporation’s taxes and avoid double taxation.

T5013

A T5013 is a Statement of Partnership Income. In more complex partnership arrangements, the income from these could result in a deferral of taxes, be added to your personal income and taxed at your personal tax rate, or be capital gains. It’s vital to seek professional advice if you’re considering investing in a partnership.

Key Takeaways

First of all, this is a VERY simple take on some elements of investment with oversimplified examples.  It’s important to remember that investing can be very complicated, but doesn’t necessarily need to be. Here are the key takeaways you should remember:

1. It’s generally better to invest in registered programs such as the FHSA, TFSA, or RRSP first, however;
2. It’s vital to get specifically tailored advice from a qualified professional with regards to how you should invest, and;
3. You should discuss your investment strategy with your accountant to ensure you aren’t paying more tax than you need to pay.

Remember

It’s a complicated world out there.  It’s your money and your right AND responsibility to take care of it. If you don’t take care of your money, someone else will…