Table of Contents
- Introduction to Investment Income and Expenses
- Interest Income and Interest-Producing Investments
- Reporting Interest Income from T5 Slips
- How to Handle Joint Investment Accounts and Report Income Properly
- Reporting Joint Account Interest on the T1 Return
- Best Practice for Allocating and Reporting Shared Investment Income (T-Slips)
- 📘 Dividend Income and the Different Types of Dividends
- 💰 Reporting Ineligible Dividend Income and Dividend Tax Credits
- Reporting Eligible Dividend Income and Tax Credits
Introduction to Investment Income and Expenses
As you move deeper into your tax preparer journey, you’ll start encountering tax situations that go beyond employment income. One of the most common — and important — areas to understand is investment income.
Investment income represents money earned from your savings, investments, or assets rather than from working at a job. While this type of income can come from many different sources, the key thing to remember is that each type of investment income is taxed differently under Canadian tax law.
In this section, we’ll introduce you to the main types of investment income you’ll come across, the basic tax treatment for each, and the common expenses that can be deducted against them.
What Is Investment Income?
Investment income generally includes money earned from:
- Interest (e.g., from bank accounts, bonds, or GICs)
- Dividends (e.g., from shares of Canadian or foreign corporations)
- Capital Gains (profits from selling investments like stocks or property for more than their purchase price)
Each type of investment income has its own set of tax rules and reporting requirements on the T1 General tax return.
Different Tax Treatments
One of the first things new tax preparers notice is that not all investment income is taxed the same way. Let’s look at the basics:
- Interest Income
- This is the simplest type of investment income.
- It’s fully taxable — meaning 100% of the amount earned must be included in income for the year.
- Common sources include savings accounts, term deposits, bonds, and GICs.
- Dividend Income
- Dividends come from owning shares in corporations that pay out part of their profits to shareholders.
- Canadian dividends receive preferential tax treatment — they’re “grossed-up” and then eligible for a dividend tax credit, which reduces the amount of tax payable.
- There are two types of dividends:
- Eligible dividends: Paid by large public corporations and taxed at a lower rate.
- Non-eligible dividends: Paid by small private corporations and taxed slightly higher.
- Capital Gains
- When you sell an investment for more than you paid for it, the profit is called a capital gain.
- Only 50% of the capital gain is taxable.
- This is one of the reasons investors and tax planners often prefer to earn income through capital gains rather than interest — the tax rate is effectively lower.
Why Investment Income Adds Complexity
While investment income isn’t inherently difficult to calculate, the different tax rates and reporting rules can make it a bit more complex than employment income.
For example:
- Dividends require “gross-up” and tax credit calculations.
- Capital gains require you to track the adjusted cost base (ACB) of your investments.
- Some investments may involve foreign income, which introduces extra reporting obligations.
Tax planning also plays a big role here. The preferential treatment of dividends and capital gains often leads taxpayers to consider how and where to hold their investments to minimize tax.
Investment Expenses
You may be able to deduct certain expenses related to earning investment income. These might include:
- Investment management or advisory fees (not including fees paid inside registered plans like RRSPs or TFSAs)
- Interest paid on money borrowed to earn investment income
- Accounting fees for record-keeping or investment-related advice
- Safe deposit box fees (note: these are no longer deductible as of 2014)
These deductions help reduce the net taxable amount of investment income — but always ensure the expense was incurred to earn income, not for personal or capital purposes.
Income Splitting and Reporting Rules
Investment income can raise some questions about who should report the income:
- Can you split investment income between spouses?
- Can parents transfer investment income to their children to pay less tax?
Generally, the attribution rules prevent shifting investment income to a lower-income family member if the funds were originally provided by the higher-income person. However, there are exceptions — for example, if a spouse invests their own independent income or if children earn income from their own investments.
Foreign Investment Income
If you or your client earn investment income from outside Canada, additional reporting rules may apply:
- Foreign income (such as dividends or interest) must be converted to Canadian dollars and reported on the tax return.
- If you own foreign property costing more than $100,000 CAD, you must also file form T1135 – Foreign Income Verification Statement.
This form helps the Canada Revenue Agency (CRA) track foreign assets and ensure proper reporting of overseas investments.
Why This Matters for New Tax Preparers
Understanding investment income is a key milestone for anyone learning to prepare taxes. It teaches you:
- How different types of income are treated under the Income Tax Act
- How deductions and credits interact with various income sources
- How to recognize when a situation might require additional forms or professional judgment
As you progress, you’ll see that investment income often drives more advanced tax planning — but the foundation begins right here.
For now, focus on recognizing the main income types, understanding their basic tax treatment, and learning where deductions might apply.
In the next lessons, we’ll start by looking at interest income — the most straightforward type of investment income — before moving on to dividends and capital gains.
Interest Income and Interest-Producing Investments
When preparing a Canadian income tax return, one of the most common types of investment income you’ll encounter is interest income.
Understanding what qualifies as interest income and how it is reported is essential for any new tax preparer. Let’s walk through the basics.
What Is Interest Income?
Interest income is the money earned from lending or investing funds where the borrower or institution pays you interest for the use of your money.
In simpler terms — you allow your money to work for you, and in return, you earn interest.
Common examples of interest-producing investments include:
- Guaranteed Investment Certificates (GICs)
- Term deposits
- Savings accounts
- Corporate or government bonds
- Mutual funds that hold interest-paying securities
Interest income is considered fully taxable. This means every dollar of interest earned must be included in the taxpayer’s total income for the year — the same way as salary, wages, or business income.
So, earning $1 in interest is taxed exactly the same as earning $1 from employment.
How Interest Income Is Reported
When you or your client earn interest, the financial institution or investment provider will usually issue an information slip that summarizes how much interest was paid during the year.
The two main slips for reporting interest income are:
1. T5 – Statement of Investment Income
- Issued by corporations, such as banks or credit unions.
- Commonly issued for GICs, savings accounts, or corporate bonds.
- Shows the total interest paid during the calendar year.
- Includes the payer’s name, account details, and amount of interest to report.
2. T3 – Statement of Trust Income Allocations and Designations
- Issued by trusts, such as mutual funds or income trusts.
- Most mutual funds in Canada are structured as trusts, so they issue T3 slips.
- The slip shows your share of the fund’s income — which may include interest, dividends, or capital gains — that “flows through” from the trust to you.
👉 Key difference:
- T5 slips come from corporations (like banks).
- T3 slips come from trusts (like mutual funds).
For reporting purposes, both are treated the same way — they simply identify different types of payers.
When No Slip Is Issued
Sometimes, individuals earn interest without receiving a T3 or T5 slip.
For example:
- You lend money to a friend, relative, or another person (whether related or not).
- You receive interest payments on that loan.
Even though no slip is issued, this income must still be reported on your tax return.
Let’s look at an example:
Example:
Jason lends $100,000 to his brother’s friend at 5% interest.
He earns $5,000 in interest during the year.
No slip is provided, but Jason is required to report the $5,000 as interest income on his tax return.
This is because the Canadian tax system is self-assessing. Taxpayers are responsible for accurately declaring all income — even if a slip isn’t issued.
Common Sources of Interest Income
| Source | Type of Investment | Slip Issued | Taxable? |
|---|---|---|---|
| Savings or chequing accounts | Bank deposits | T5 | Yes |
| GICs (Guaranteed Investment Certificates) | Fixed-term investments | T5 | Yes |
| Bonds | Government or corporate | T5 | Yes |
| Mutual funds or income funds | Trusts | T3 | Yes |
| Private loans | Personal lending arrangements | None | Yes |
Reporting Interest Income on a Tax Return
All interest income — whether from a T3, T5, or other source — must be reported on the T1 General income tax return under:
📄 Line 12100 – Interest and Other Investment Income
This line covers:
- Interest from bank accounts, bonds, GICs, or loans
- Interest that accrued (earned but not yet received)
- Any other interest-based investment earnings
If a slip includes multiple types of income, only the interest portion is reported here.
(Other parts, such as dividends or capital gains, are reported on separate lines.)
Key Points to Remember
- Interest income is fully taxable.
There are no special credits or discounts like with dividends or capital gains. - T5 = corporation; T3 = trust.
Both must be included in total income. - No slip? Still report it.
Even without a T5 or T3, the taxpayer must calculate and report the income. - Accrued interest counts too.
If an investment pays interest at maturity (like a multi-year GIC), the interest is taxable annually as it accrues, not just when it’s received. - Accuracy matters.
The CRA can cross-check slips through their database, so missing or unreported interest income can trigger reassessments or penalties.
In Summary
Interest income may seem simple, but it’s one of the most common areas where small mistakes happen — especially when slips are missing or when investments pay interest irregularly.
As a new tax preparer, always:
- Ask clients to provide all T3 and T5 slips.
- Check if they earned any private loan interest or foreign interest.
- Report all interest accurately on line 12100.
Mastering this section lays the foundation for understanding more complex investment income sources, such as dividends and capital gains, which have additional tax rules and credits.
In the next topic, we’ll explore dividend income — how it’s reported, and why it’s taxed more favourably than interest income.
Reporting Interest Income from T5 Slips
When preparing a Canadian income tax return, one of the most common forms you’ll encounter for investment income is the T5 slip (Statement of Investment Income). This slip reports various types of investment income, such as interest, dividends, and certain foreign income, that an individual has earned during the year.
In this section, we’ll focus specifically on interest income reported on T5 slips — how to understand it, how to handle U.S. or foreign amounts, and where to report it on the return.
1. What Is a T5 Slip?
A T5 slip is issued by financial institutions or corporations (such as banks, credit unions, or investment firms) to report investment income earned by an individual.
If you or your client have earned more than $50 in interest from one source, the payer is required to issue a T5 slip to both you and the Canada Revenue Agency (CRA).
Each T5 slip includes key details such as:
- The payer’s name (e.g., TD Bank, Scotiabank)
- The recipient’s name and SIN
- The amount of interest earned (Box 13 for interest)
- The currency in which the income was paid (if not Canadian dollars)
Even if the interest earned is less than $50, it is still taxable and must be reported — even though no T5 may be issued.
2. Understanding the Example
Let’s look at an example to understand how T5 reporting works in practice.
Example:
Mary Smith received two T5 slips in the same tax year:
- From TD Canada Trust – Interest from a term deposit: $1,412.20 CAD
- From Scotia McLeod – Interest from a U.S. dollar savings account: $1,000 USD
These two slips must both be included in Mary’s tax return as interest income.
3. Reporting Canadian Interest Income
For the T5 issued in Canadian dollars — like the one from TD Bank — the process is straightforward:
- Locate Box 13 on the T5 slip.
- This box shows the total interest income earned during the calendar year.
- That full amount must be reported on the taxpayer’s return.
For Mary, the TD Bank slip shows $1,412.20, which is entered as Canadian-dollar interest income.
4. Reporting Foreign Interest Income (e.g., U.S. Dollars)
If the T5 slip indicates income earned in a foreign currency, you must convert the amount to Canadian dollars (CAD) before reporting it.
In Mary’s case, her Scotia McLeod slip shows $1,000 USD, and the slip itself indicates this by marking “USD” in the currency box (Box 27).
To report this correctly:
- Convert the $1,000 USD into Canadian dollars using the average annual exchange rate for that tax year.
- The average exchange rate is published by the Bank of Canada (for example, 1.3248 for the 2022 tax year).
✅ So, Mary’s $1,000 USD becomes $1,324.80 CAD ($1,000 × 1.3248).
This converted amount is what will be included as interest income on her Canadian tax return.
5. Where to Report Interest Income
All interest income — whether from Canadian or foreign sources — is reported on the T1 General Income Tax Return at:
📄 Line 12100 – Interest and Other Investment Income
This includes:
- Interest from Canadian banks or GICs (T5 slips)
- Interest from mutual funds (T3 slips)
- Interest from private loans or bonds
- Interest earned on foreign accounts (after currency conversion)
If multiple T5 slips are received, the amounts should be added together and reported as a total on Line 12100.
6. Common Scenarios You’ll Encounter
| Situation | What to Do |
|---|---|
| Multiple T5 slips from different banks | Add all Box 13 amounts and report the total |
| Interest paid in foreign currency (USD, EUR, etc.) | Convert to CAD using the average annual exchange rate |
| Interest under $50 with no slip issued | Still report it manually |
| Joint accounts (spouse or partner) | Split the interest income according to ownership percentage |
| Accrued interest not yet received | Report it in the year it was earned, not just when it’s paid |
7. Important Notes for New Tax Preparers
- CRA Cross-Checks T5 Slips: The CRA receives copies of all T5 slips directly from banks and investment firms. If you forget to include one, the CRA may reassess the return later.
- Foreign Currency Accuracy: Always use the official Bank of Canada annual average rate unless a specific transaction rate applies.
- Full Taxation: Interest income is fully taxable — there’s no preferential rate like with dividends or capital gains.
- Include All Sources: Even small accounts or short-term deposits must be included.
8. Example Summary
Let’s summarize Mary Smith’s example:
| Source | Currency | Amount | Converted to CAD | Reported on Line 12100 |
|---|---|---|---|---|
| TD Canada Trust (GIC) | CAD | $1,412.20 | $1,412.20 | ✅ |
| Scotia McLeod (USD account) | USD | $1,000.00 | $1,324.80 | ✅ |
➡️ Total interest income reported: $2,737.00 CAD
9. Key Takeaways
- T5 slips report interest and other investment income from Canadian payers.
- Box 13 is the main field for interest income.
- Foreign interest must be converted to Canadian dollars.
- Line 12100 is where all interest income is ultimately reported on the T1 return.
- Even without a slip, all interest income must be declared.
In Summary
Reporting interest income is one of the most straightforward tasks for a tax preparer — but accuracy is key. Always:
- Check for multiple T5s from different banks.
- Verify if any are in foreign currency.
- Make sure all amounts flow correctly to line 12100 on the return.
Learning to handle T5 slips confidently gives you a strong foundation for more advanced investment topics, such as dividends, capital gains, and foreign investment reporting, which we’ll explore next.
How to Handle Joint Investment Accounts and Report Income Properly
When preparing Canadian income tax returns, one of the most common questions new tax preparers encounter is:
“Can investment income — like interest, dividends, or capital gains — be split between spouses?”
The short answer is yes, in many cases it can. However, there are a few important details to understand before you report or split this type of income on a tax return.
💡 Understanding Investment Income Ownership
Investment income, such as interest or dividends reported on T5 or T3 slips, technically belongs to the person who contributed the money (the “principal”) that earned the income.
Under the Income Tax Act, each person should report the share of income that corresponds to their contribution.
For example:
- If a couple invests $10,000 together in a GIC, and one spouse contributed $3,000 while the other contributed $7,000,
→ then the first spouse should report 30% of the interest,
→ and the second spouse should report 70%.
That’s the technical rule.
🏦 How It Works in Real Life (Practical Application)
In practice, most couples share their finances jointly. It’s often unrealistic to track exactly who contributed which amount — especially if money is regularly transferred between shared accounts.
For joint investment accounts, the Canada Revenue Agency (CRA) generally accepts a 50/50 split between spouses.
Even if only one name appears on the slip, as long as the income is truly shared between both spouses (for example, both benefit from the account), splitting it evenly is generally acceptable.
Tax preparers commonly follow these general guidelines:
- If the investment is in a joint account, split the income 50/50 between spouses.
- If each spouse has separate investment accounts, report the income according to whose name is on the account and who benefits from it.
- If the income all belongs to one spouse but you want to split it, ensure there’s a legitimate reason (such as shared ownership of the investment).
The CRA rarely challenges reasonable splits between spouses when the income genuinely belongs to both parties.
⚠️ When It Becomes a Problem
Problems arise if the split is used solely to reduce tax unfairly — for example:
- The higher-income spouse earns all the money and invests it.
- The T5 slip is only in their name.
- But the couple decides to report all the investment income on the lower-income spouse’s return to pay less tax.
This would likely attract CRA scrutiny.
If the CRA determines that the lower-income spouse didn’t actually contribute to the investment, the income could be “attributed back” to the higher-income spouse, and the CRA could reassess the return.
👨👩👧👦 What About Children?
Income splitting does not apply to children in the same way it does for spouses.
If a parent gives money to a child to invest, any resulting investment income is usually attributed back to the parent for tax purposes (this is called the attribution rule).
There are some exceptions, such as when a child invests their own earnings or inheritance, but in general, you cannot shift investment income to a child just to lower taxes.
🧾 Best Practices for Tax Preparers
If you’re helping a client — or preparing your own taxes — and encounter investment income:
- Ask about the ownership of the investment account (joint or individual).
- Determine who contributed to the investment if possible.
- Split reasonably based on shared ownership or benefit.
- Document your reasoning — keep notes about why you split income a certain way.
- Avoid aggressive income shifting, as CRA can reverse it under the attribution rules.
✅ Key Takeaway
For most couples with shared finances, splitting investment income 50/50 is both practical and acceptable.
However, always ensure the split reflects who actually owns or benefits from the investment.
Transparency and consistency are key — if you can explain why you split the income a certain way, you’ll rarely run into problems.
Reporting Joint Account Interest on the T1 Return
It’s common for Canadians to share investment accounts — not only between spouses but also with siblings, parents, or friends. When that happens, the question arises:
“How do I report my share of the interest income on my tax return?”
Let’s go step-by-step through how joint investment interest should be reported on the T1 General return.
💡 Understanding Joint Investment Income
When more than one person owns an investment account, each owner is responsible for reporting their share of the income it earns.
This includes income such as:
- Interest from savings or term deposits (T5 slips)
- Dividends or other investment income
Even though the financial institution may issue a single T5 slip showing the total amount of interest earned, that income must be divided among all the owners according to their share of ownership in the account.
🧮 Example: Joint Account Between Siblings
Let’s take an example similar to what you might encounter as a tax preparer:
Mary, Martin, and Jane are siblings.
They jointly hold a U.S. dollar investment account at a Canadian brokerage.
The T5 slip for the year shows $12,000 USD in box 13 (interest income).
They agreed that each person owns one-third of the account.
Therefore:
- Each sibling must report $4,000 USD (that’s 1/3 of $12,000)
- This amount must be converted to Canadian dollars using the average annual exchange rate for the year (as published by the Bank of Canada)
On Mary’s tax return, she will report her share of $4,000 (converted to CAD) on line 12100 – Interest and Other Investment Income.
🧾 Why Report Only Your Share?
When the Canada Revenue Agency (CRA) receives T5 slips, it matches the total income reported by the financial institution with what taxpayers report on their returns.
If the T5 slip is in only one person’s name, it might seem like that person earned all the income — even if the investment is shared.
To avoid confusion, you should:
- Clearly indicate that the income is from a joint account, and
- Report only the proportionate share that belongs to your client (or yourself).
If the CRA ever inquires, documentation showing that the account is jointly owned — such as account statements or a written agreement between the co-owners — will support the way the income was split.
💱 Handling Foreign Currency (USD Accounts)
If the investment earns income in U.S. dollars or another currency, it must be converted to Canadian dollars before being reported on the return.
Use the average annual exchange rate for the tax year as published by the Bank of Canada.
Example:
If the average exchange rate for the year was 1 USD = 1.32 CAD,
then Mary’s $4,000 USD share would be reported as $5,280 CAD ($4,000 × 1.32).
✅ Key Takeaways for New Tax Preparers
- Always report only the taxpayer’s actual share of the income from a joint account.
- Document ownership percentages — whether it’s 50/50, one-third each, or another ratio.
- Convert foreign income to Canadian dollars using the proper exchange rate.
- Ensure consistency: all co-owners should report their own share of the same T5 slip.
- Be transparent: if CRA ever questions why only part of a T5 slip was reported, clear documentation will resolve the issue.
🧠 Final Thought
Joint investment accounts are common, and reporting them correctly prevents confusion or reassessments later.
As a tax preparer, your role is to ensure that each taxpayer reports only what truly belongs to them — no more, no less — while keeping proper records in case the CRA ever asks for clarification.
Best Practice for Allocating and Reporting Shared Investment Income (T-Slips)
When you start preparing Canadian tax returns, one of the most common challenges you’ll face is how to report shared investment income that appears on T-slips (such as T5s for interest or T3s for dividends and trusts).
It’s very common for taxpayers to share investments with their spouse, siblings, or friends — for example, joint savings accounts, joint investment portfolios, or family-owned term deposits. In these cases, the total income shown on the T-slip does not belong entirely to one person. Each person must report only their share of that income on their tax return.
Let’s explore how to handle this correctly and in a way that avoids confusion with the Canada Revenue Agency (CRA).
🧾 Understanding Shared or Joint Investments
Investment income reported on T-slips can come from:
- Interest (reported on T5 slips)
- Dividends (also reported on T5s)
- Mutual funds or trust income (reported on T3s)
- Other types of investment returns
If two or more people contribute to an investment, each is responsible for reporting only their proportionate share of the income. This proportion might be 50/50 for a joint account with a spouse or one-third each for three siblings sharing an investment.
💡 The Core Principle: Report Only What Belongs to the Taxpayer
Each taxpayer should report only the portion of income that truly belongs to them based on ownership or contribution.
For example:
| Investment | Total Income on T5 | Who Shares | Ownership Share | Amount to Report |
|---|---|---|---|---|
| Tangerine Bank | $685 | Mark & his friend | 50% | $342.50 |
| TD Waterhouse | $1,018 | Mark & spouse | 50% | $509.00 |
| CIBC Wood Gundy | $4,800 | Mark + 3 siblings | 25% | $1,200 |
| Laurentian Bank | $6,420 | Mark + 2 siblings | 33% | $2,140 |
In this case, even though the slips show $12,983 total, Mark’s true share is only about $4,190, which is what he must report on line 12100 – Interest and Other Investment Income of his T1 return.
⚖️ Two Ways to Enter the Amounts (and Which Is Better)
There are generally two approaches people use when reporting shared investment income:
- Report only your share of the income
- Example: Report only $342.50 instead of the $685 shown on the slip.
- ❌ Risk: The CRA’s system may flag a mismatch because it sees a T5 slip for $685 but only $342.50 reported. This could lead to a review or reassessment request asking for an explanation.
- Report the full amount shown on the T-slip but indicate the taxpayer’s ownership percentage
- Example: Report the full $685 but specify that only 50% applies to the taxpayer.
- ✅ Best Practice: This makes it clear to CRA that you recognize the full slip but are claiming only a share of it.
- This method also helps CRA reconcile the T-slip more easily if they review the file.
📊 Why CRA Matching Matters
The CRA routinely compares (or matches) the information reported on T-slips issued by financial institutions against the amounts individuals report on their returns.
If the total from the T-slip doesn’t appear on any taxpayer’s return, the CRA may assume the full amount was omitted and issue a reassessment.
By recording the total income along with the percentage that applies to the taxpayer, you make it easy for the CRA to see how the income was allocated and avoid unnecessary review letters.
🧮 Handling Multiple Slips and Percentages
It’s common for one person to have multiple investments, each shared with different people and at different percentages.
For example:
- A joint GIC with a friend (50%)
- An investment account with a spouse (50%)
- A family account with siblings (25% or 33%)
Each slip should be recorded separately, showing:
- The total amount reported on the slip, and
- The percentage or portion that belongs to the taxpayer.
This approach keeps the records consistent and transparent, both for you as a tax preparer and for CRA review.
💬 What to Expect if CRA Contacts You
If the CRA ever reviews a file, they might ask:
“Why did you only report part of this T5 slip?”
When you’ve followed best practice and recorded the total amount and percentage, it’s easy to explain.
You can show that the taxpayer owns only part of the investment, and the remaining income was reported by other co-owners.
This method builds confidence in your work and reduces unnecessary back-and-forth with CRA.
✅ Key Takeaways for New Tax Preparers
- Always record the full amount shown on the T-slip.
- Clearly state the ownership percentage or share that applies to the taxpayer.
- Use documentation (such as account statements or agreements) to support the allocation if CRA asks.
- Be consistent — all co-owners should report their appropriate shares of the same slip.
- Apply this approach to all types of investment income — interest, dividends, foreign income, or trust income.
🧠 Final Thought
When preparing tax returns, accuracy and transparency are key.
By reporting the total slip amount along with the taxpayer’s ownership share, you’ll avoid mismatches, save time if CRA reviews the file, and ensure your clients’ returns are both correct and compliant.
This is a simple yet powerful best practice every new tax preparer should adopt early in their career.
📘 Dividend Income and the Different Types of Dividends
When you start learning about investment income in Canada, dividends can feel confusing at first — but once you understand the logic behind how they’re taxed, it starts to make sense. Dividends are a common form of investment income for Canadians, especially those who invest in stocks or mutual funds, or who own shares in small private corporations.
Let’s break this topic down step by step so that even if you’re brand new to tax preparation, you’ll understand how to handle dividend income on a tax return.
💡 What Is Dividend Income?
Dividend income is a payment made by a corporation to its shareholders as a way of distributing its profits. Think of it as a reward for owning a piece of the company.
- Public corporations (like those trading on the Toronto Stock Exchange) often pay dividends to their investors quarterly.
- Private corporations, such as small businesses in Canada, can also pay dividends to their owners as a form of compensation instead of salary.
So, whenever you or your client hold shares in a company — either through direct ownership or a mutual fund — they may receive dividend income.
🧾 Why Dividends Are Treated Differently for Tax Purposes
Dividends are taxed differently from employment or interest income because the corporation paying the dividend has already paid tax on its profits before distributing them to shareholders.
To prevent double taxation, the Canadian tax system uses two special mechanisms:
- Gross-up – to reflect the company’s pre-tax profits.
- Dividend tax credit – to give credit to the shareholder for the taxes already paid at the corporate level.
Together, these rules make dividends more tax-efficient than regular interest or employment income.
🇨🇦 Types of Dividends in Canada
Dividends paid by Canadian corporations fall into two main categories, each with its own gross-up rate and tax credit. There’s also a third category for foreign dividends, which are treated differently.
1. Non-Eligible Dividends (Small Business Dividends)
These are dividends paid by Canadian-controlled private corporations (CCPCs) — typically small businesses that benefit from the small business deduction.
- These dividends are “non-eligible” because the corporation paid a lower rate of corporate tax on its profits.
- To compensate, the gross-up and dividend tax credit are lower.
Example (2019 rates):
If a taxpayer received $10,000 in non-eligible dividends, they must report 115% of that amount on their return — that’s $11,500.
Then, they can claim a federal dividend tax credit equal to 9.03% of that grossed-up amount (plus a provincial credit).
2. Eligible Dividends (Public or Large Corporation Dividends)
These are paid by larger Canadian corporations that pay tax at the general corporate rate.
- Because the corporation already paid more tax, the gross-up and dividend tax credit are higher.
- These dividends are taxed at the most favorable rate for individuals.
Example (2019 rates):
If you received $10,000 in eligible dividends, the amount you report on your tax return is $13,800 (a 38% gross-up).
You then receive a federal dividend tax credit of 15.02% of the grossed-up amount (plus a provincial credit).
3. Foreign Dividends
If the dividend is paid by a non-Canadian corporation (for example, Apple or Google shares), it doesn’t qualify for Canada’s gross-up or dividend tax credit system.
- You simply report the amount received as regular income, just like interest income.
- These dividends are fully taxable at your marginal rate.
- Any foreign tax withheld (for example, 15% U.S. withholding tax) can often be claimed as a foreign tax credit to avoid double taxation.
📊 How to Identify Dividend Types on Tax Slips
You’ll typically find dividend income reported on the following slips:
- T5 Statement of Investment Income
- T3 Statement of Trust Income Allocations and Designations
Each slip clearly identifies whether the dividend is eligible or non-eligible. If the slip doesn’t specify, it’s likely foreign income or another type of investment return.
📅 Why Dividend Rates Change Each Year
The gross-up percentages and dividend tax credit rates can vary slightly from year to year due to changes in tax policy. When preparing returns, always check the Canada Revenue Agency (CRA) guidelines or the federal and provincial tax tables for the correct rates for that specific tax year.
🧠 Summary — Key Takeaways for New Tax Preparers
| Type of Dividend | Who Pays It | Gross-Up Rate | Federal Dividend Tax Credit | Tax Treatment |
|---|---|---|---|---|
| Eligible Dividend | Public corporations or large Canadian companies | 38% | 15.02% (2019) | Most favorable tax rate |
| Non-Eligible Dividend | Small private Canadian corporations | 15% | 9.03% (2019) | Favorable, but less than eligible dividends |
| Foreign Dividend | Non-Canadian corporations | None | None | Taxed as regular income |
✅ Final Thoughts
Dividends are one of the most tax-efficient ways for Canadians to earn income, but they come with their own set of calculations and reporting requirements. As a future tax preparer, it’s important to:
- Identify whether dividends are eligible, non-eligible, or foreign.
- Understand how the gross-up and dividend tax credit work together.
- Always use the correct year’s rates when preparing tax returns.
Once you get familiar with these concepts, dividend reporting becomes much easier — and you’ll see why many Canadian investors love dividend-paying stocks and corporations.
💰 Reporting Ineligible Dividend Income and Dividend Tax Credits
Now that you know what eligible and ineligible dividends are, let’s look at how ineligible (also called non-eligible) dividends are reported on a Canadian personal tax return. This is a key skill for new tax preparers, and while it sounds complicated, once you understand the structure of how the CRA wants this information, it’s actually quite logical.
🧾 What Are Ineligible Dividends?
Ineligible dividends are typically paid by small Canadian private corporations, also known as Canadian-Controlled Private Corporations (CCPCs), that claim the small business deduction.
These corporations pay a lower corporate tax rate, so to balance that out, the shareholder who receives the dividend gets a smaller dividend tax credit. In other words, these dividends receive slightly less favorable tax treatment than eligible dividends — but still more favorable than interest income.
💡 Example Scenario
Let’s say Mary owns a small business, Smith Consulting Group Inc., and she receives a $10,000 dividend from her company in 2024.
Because it’s paid by a small business that qualifies for the small business deduction, this is an ineligible dividend.
Mary’s accountant issues her a T5 slip for this dividend. This slip is crucial because it tells the CRA (and Mary) exactly what type of income it is and where it should be reported on her personal tax return.
📄 Where to Find Ineligible Dividends on a T5 Slip
On the T5 Statement of Investment Income, ineligible dividends appear in:
- Box 10 — Actual amount of dividends (other than eligible dividends)
If the dividend came through a mutual fund or trust, it would appear instead on a T3 slip, typically in:
- Box 23 — Dividends other than eligible dividends
It’s important to report the amounts exactly as they appear on the slip. You should never manually change the gross-up or tax credit amounts — those are calculated automatically based on CRA rules for the specific tax year.
📊 Reporting Ineligible Dividends on the T1 Tax Return
When preparing the T1 personal income tax return, the amount from the T5 or T3 slip is grossed up before it’s added to the taxpayer’s income.
👉 What Does “Gross-Up” Mean?
The gross-up increases the reported amount of the dividend to reflect the pre-tax profits of the corporation.
For ineligible dividends, the gross-up rate has been around 15%–17%, depending on the tax year.
Example (using 2019 rules):
- Actual dividend received: $10,000
- Gross-up rate: 15%
- Taxable amount reported on the T1: $11,500
So, even though Mary actually received only $10,000, her taxable income will include $11,500.
This doesn’t mean she’s paying more tax — because she also gets a tax credit to offset this.
🧮 Claiming the Dividend Tax Credit
To prevent double taxation, the CRA allows shareholders to claim a dividend tax credit on their grossed-up dividend income.
This credit reflects the tax already paid by the corporation before distributing profits.
On the federal level, the dividend tax credit for ineligible dividends is usually around 9–11% of the grossed-up amount, depending on the year. Each province also offers its own dividend tax credit.
Example (2019 numbers):
- Grossed-up dividend: $11,700
- Federal dividend tax credit rate: 10.521%
- Dividend tax credit: $1,231
That $1,231 credit is applied directly against Mary’s federal tax payable — it’s not a deduction from income, but a non-refundable tax credit that reduces the amount of tax she owes.
🧾 Where It Appears on the T1
On the T1 General Return:
- The taxable amount of ineligible dividends is reported on line 12000 (“Taxable amount of dividends (eligible and other than eligible)”).
- The actual dividend (before gross-up) appears separately for reference.
- The dividend tax credit appears on Schedule 1 (Federal Tax) → Step 3: Net Federal Tax under Federal Dividend Tax Credit.
If you’re preparing taxes by hand or using software, the amounts flow automatically from the T5 or T3 slip entries to the correct lines on the return.
⚖️ Why Dividends Are Still Tax-Favorable
Even though ineligible dividends are grossed up (which increases taxable income), the dividend tax credit offsets much of that added income.
That’s why dividends — even ineligible ones — are generally taxed at lower effective rates than regular interest income or employment income.
The system ensures that income earned through a corporation isn’t taxed twice at full rates — once at the corporate level and again at the personal level.
✅ Key Takeaways for New Tax Preparers
| Concept | Explanation |
|---|---|
| Ineligible Dividend | Paid by small Canadian corporations (CCPCs) that use the small business deduction. |
| Where Found | T5 (Box 10) or T3 (Box 23). |
| Gross-Up Rate | Around 15–17% (check CRA tables for the year). |
| Federal Dividend Tax Credit | About 9–11% of the grossed-up amount. |
| Reported On | Line 12000 of the T1 return. |
| Effect on Taxes | Increases taxable income, but offset by a dividend tax credit — lower tax rate overall. |
💬 Final Thoughts
When you’re starting out as a tax preparer, dividend reporting may seem technical — but once you understand how to identify the type of dividend, find it on the slip, and apply the gross-up and tax credit rules, it becomes very straightforward.
Always:
- Report exactly what appears on the slip.
- Let the CRA’s prescribed rates for that year determine the gross-up and credit.
- Remember that dividend tax credits make dividend income more tax-efficient than other investment income types.
Mastering this concept is a key building block for handling investment income accurately in Canadian tax preparation.
Reporting Eligible Dividend Income and Tax Credits
When you invest in Canadian companies—whether directly by owning shares or indirectly through mutual funds—you may receive dividend income. In Canada, dividends are a way for corporations to share their profits with shareholders. However, not all dividends are treated equally for tax purposes.
In this section, we’ll focus on eligible dividends, how they are reported on the income tax return, and how the dividend gross-up and tax credit system works.
What Are Eligible Dividends?
Eligible dividends are generally paid by large Canadian corporations that have already paid corporate income tax at the higher, general corporate tax rate. To avoid double taxation (once at the corporate level and again at the individual level), the government allows individuals who receive eligible dividends to benefit from a gross-up and dividend tax credit mechanism.
This system ensures that eligible dividends are taxed at a lower effective tax rate, making dividend income more tax-efficient compared to interest income.
Where Do You Find Eligible Dividend Information?
If you receive eligible dividends, you will see them reported on one of the following slips:
- T5 Slip – Box 24 shows “Eligible dividends.”
- T3 Slip – Box 49 shows “Eligible dividends from Canadian corporations.”
- T5013 Slip – Box 50 shows “Dividend income (eligible).”
These slips are issued by the company, mutual fund, or financial institution that paid the dividend.
How to Report Eligible Dividend Income
Let’s use a simple example:
Example:
John owns shares in a Canadian mutual fund, and during the year, he received $10,000 of eligible dividends, as shown in Box 49 of his T3 slip.
When reporting this on the tax return:
- Start with the actual amount of dividends received – in this case, $10,000.
- Apply the gross-up – Eligible dividends are grossed up by 45%.
- $10,000 × 1.45 = $14,500
- This $14,500 represents the “taxable amount” of eligible dividends.
- Report this taxable amount on line 12000 of the T1 General return.
So, even though John only received $10,000 in cash, he must report $14,500 as income.
The Dividend Tax Credit
To compensate for the higher taxable amount, individuals also receive a dividend tax credit (DTC). The DTC reduces the actual amount of income tax you owe.
The federal dividend tax credit for eligible dividends is 15.0198% of the grossed-up amount (though this rate can vary slightly depending on the tax year). Each province or territory also provides its own provincial dividend tax credit.
Continuing the example:
- Grossed-up dividend: $14,500
- Federal dividend tax credit (approx. 15.02%): $14,500 × 15.02% = $2,178
- John’s taxable income includes $14,500, but he also gets a tax credit of about $2,178, which reduces his total tax payable.
Why the Gross-Up and Credit Exist
The gross-up and credit mechanism is designed to integrate corporate and personal taxation.
Here’s why:
- When a company earns profits, it pays corporate income tax.
- When it pays dividends to shareholders, those dividends come from after-tax profits.
- If individuals were taxed again on the full amount of dividends, it would mean the same income is taxed twice.
To fix this, the tax system:
- Grosses up the dividend to show the pre-tax equivalent amount.
- Provides a tax credit to reflect the corporate tax already paid.
This integration helps make dividend income more tax-efficient than interest income.
Where the Amounts Appear on the Tax Return
- Line 12000 – Taxable amount of dividends (both eligible and ineligible).
- Schedule 1 (Step 3) – Federal Dividend Tax Credit is calculated.
- Provincial or Territorial Schedule – Provincial Dividend Tax Credit is also determined.
The total credits from both federal and provincial levels help reduce the amount of tax payable on dividend income.
Eligible vs. Ineligible Dividends
It’s easy to get confused between the two types of dividends. Here’s a quick comparison:
| Type of Dividend | Gross-Up Rate | Federal Dividend Tax Credit Rate | Common Sources |
|---|---|---|---|
| Eligible Dividends | 45% | ~15.02% | Large public corporations |
| Ineligible Dividends | 15% | ~9.03% | Small Canadian-controlled private corporations (CCPCs) |
Key Takeaways for Beginners
- Eligible dividends are reported on Box 49 of a T3 slip or Box 24 of a T5 slip.
- The gross-up increases the dividend by 45% before reporting it as taxable income.
- You receive a dividend tax credit that reduces the tax owed on that income.
- Both federal and provincial tax credits apply.
- Always report the exact amount shown on the slip—don’t adjust or modify the figures.
Summary Example
| Description | Amount |
|---|---|
| Actual Eligible Dividend Received | $10,000 |
| Grossed-Up Amount (10,000 × 1.45) | $14,500 |
| Reported on Line 12000 | $14,500 |
| Federal Dividend Tax Credit (~15.02% of 14,500) | $2,178 |
| Net Effect | John pays tax on $14,500 but receives $2,178 in credits |
Final Thoughts
Reporting eligible dividends is an important part of preparing a Canadian tax return, especially for clients who own shares or mutual funds. As a tax preparer, your role is to ensure that each slip is entered correctly and that the appropriate tax credits are claimed.
By understanding the gross-up and dividend tax credit system, you’ll be able to explain to your clients why their dividend income is taxed more favorably than other types of income, such as interest.
Leave a Reply