How much tax you pay on a non-registered account depends entirely on what kind of income the account produces. Interest is taxed the hardest: every dollar gets added to your income at your full marginal rate. Canadian dividends get preferential treatment through a gross-up and dividend tax credit. Only 50% of capital gains are taxable. The gap between these three categories can mean thousands of dollars in tax each year on the same portfolio value, which is why what you hold in a non-registered account matters almost as much as how much you hold.
Interest Income: Taxed at Your Full Marginal Rate
Interest is the least tax-friendly form of investment income you can earn outside a registered account. Every dollar of interest from GICs, savings accounts, bonds, and similar debt instruments is included in your income at 100% and taxed at your marginal rate.1Canada Revenue Agency. Line 12100 – Interest and Other Investment Income No credit, no gross-up, no partial inclusion. Straight income, treated the same as your salary.
For 2026, federal marginal rates range from 14% on the first $58,523 of taxable income up to 33% on income above $258,482. Add your provincial rate on top, and the combined marginal rate on interest income can exceed 50% in some provinces. That makes interest-bearing investments significantly more expensive to hold in a non-registered account compared to a TFSA or RRSP, where the same interest would either grow tax-free or be tax-deferred.
Canadian Dividends: Gross-Up and Tax Credit
Dividends from Canadian corporations get a better deal than interest, thanks to a system designed to account for the corporate tax already paid on the underlying profits. You report a grossed-up dividend amount, then claim a dividend tax credit against your federal and provincial tax. The net effect is a lower effective tax rate than you would pay on the same dollar of interest.2Canada Revenue Agency. Income Tax Folio S3-F2-C2 – Taxable Dividends From Corporations Resident in Canada
Eligible Dividends
Eligible dividends come from large Canadian corporations (and some smaller ones) that have paid tax at the general corporate rate. These dividends are grossed up by 38%, meaning a $1,000 eligible dividend is reported as $1,380 of taxable income. You then claim a federal dividend tax credit equal to about 15.02% of the grossed-up amount, which works out to roughly $207 off your federal tax bill. Provincial credits reduce it further. For someone in a middle tax bracket, the combined effective rate on eligible dividends is often in the low single digits. Investors in the lowest bracket may actually pay negative tax on them.
Non-Eligible Dividends
Non-eligible dividends typically come from small businesses taxed at the reduced small business corporate rate. The gross-up is 15%, so a $1,000 non-eligible dividend becomes $1,150 of taxable income. The federal dividend tax credit is about 9.03% of the grossed-up amount. Because both the gross-up and the credit are smaller, the effective rate on non-eligible dividends lands between the rate on eligible dividends and the rate on interest. Still preferential, but less so.
Your T5 or T3 slip will show both the actual dividend amount and the taxable (grossed-up) amount, so you do not need to calculate the gross-up yourself.
Capital Gains: Only Half Is Taxed
A capital gain happens when you sell an investment for more than its adjusted cost base — the original purchase price plus any transaction costs like commissions. Only the gain triggers tax, and only when you actually sell. An investment that has doubled in value while sitting in your account owes nothing to the CRA until you dispose of it.
When you do sell, only 50% of the gain is included in your taxable income. This is the capital gains inclusion rate set out in section 38 of the Income Tax Act.3Justice Laws Website. Income Tax Act RSC 1985 c 1 5th Supp – Section 38 So if you buy a stock for $10,000 and sell it for $15,000, your $5,000 gain produces $2,500 of taxable income. At a 30% combined marginal rate, you would owe $750 in tax, an effective rate of 15% on the actual gain.
Budget 2024 proposed raising the inclusion rate to two-thirds on gains above $250,000 for individuals. Prime Minister Carney cancelled that proposal in March 2025, so the inclusion rate remains at one-half for 2026.4Prime Minister of Canada. Prime Minister Carney Cancels Proposed Capital Gains Tax Increase
Adjusted Cost Base and the Averaging Rule
If you buy shares of the same company at different times and prices, the CRA requires you to use the average cost method. Divide the total amount you have invested (including reinvested distributions and commissions) by the total number of shares you hold, and that becomes your adjusted cost base per share.5Canada Revenue Agency. Special Rules and Other Transactions You cannot cherry-pick your highest-cost shares to sell first the way U.S. investors sometimes can. The averaging rule applies to all identical properties.
Using Capital Losses to Reduce Tax
When you sell an investment for less than its adjusted cost base, the loss can offset capital gains. Only capital gains. You cannot use capital losses to reduce tax on your salary, interest, or dividends. In Canada, there is no allowance for deducting net capital losses against ordinary income.6Justice Laws Website. Income Tax Act RSC 1985 c 1 5th Supp – Section 3
If your capital losses exceed your capital gains in a given year, you can carry the net loss back three years to recover tax you already paid, or carry it forward indefinitely to offset future gains.7Canada Revenue Agency. Capital Losses A large loss realized in a bad year does not expire and can shelter gains for decades.
The Superficial Loss Rule
You cannot sell an investment to lock in a tax loss and then immediately buy it back. If you, or someone affiliated with you (a spouse, a corporation you control), repurchase the same or identical property within 30 calendar days before or after the sale, and still hold it 30 days after the sale, the CRA denies the loss entirely.7Canada Revenue Agency. Capital Losses The disallowed loss is added to the adjusted cost base of the replacement property, so you get the benefit when you eventually sell that property. But the immediate deduction is gone.
The 30-day window runs in both directions. The safest approach is to wait at least 31 calendar days before repurchasing, or to buy a similar but not identical investment in the interim.
Foreign Dividends and Withholding Tax
Dividends from foreign corporations, with U.S. stocks being the most common example for Canadian investors, do not qualify for the Canadian dividend tax credit. The CRA treats foreign dividends as regular income, taxed at your full marginal rate, the same as interest.1Canada Revenue Agency. Line 12100 – Interest and Other Investment Income
On top of that, most foreign countries withhold tax at the source before you receive the dividend. Under the Canada-U.S. tax treaty, the standard withholding rate on U.S. dividends paid to a Canadian resident’s non-registered account is 15%. To prevent double taxation, you claim a foreign tax credit on your Canadian return for the amount withheld abroad. You report the full gross dividend as income, then claim the credit on line 40500.1Canada Revenue Agency. Line 12100 – Interest and Other Investment Income
The foreign tax credit only applies in non-registered accounts. If you hold U.S. dividend-paying stocks in a TFSA, the 15% U.S. withholding still applies but you get no Canadian credit to offset it, because TFSAs do not generate taxable income. An RRSP is exempt from U.S. withholding under the treaty, making it the most tax-efficient home for U.S. dividend stocks.
Return of Capital Distributions
Some investments, particularly mutual funds, ETFs, and income trusts, pay distributions that include return of capital. This is not income. It is a portion of your own invested money coming back to you, and it is not taxable when you receive it. Instead, it reduces your adjusted cost base.8Canada Revenue Agency. Tax Treatment of Mutual Funds
The catch: if return of capital distributions reduce your adjusted cost base to zero, any further return of capital is treated as a capital gain and taxed accordingly. And because the lower adjusted cost base means a larger capital gain when you eventually sell, return of capital is really tax deferral, not tax elimination. Investors who hold return-of-capital-heavy funds for many years sometimes get a surprise at disposition when the adjusted cost base has been ground down to nearly nothing.
Effective Tax Rates by Income Type
The effective rate on each type of investment income depends on your combined federal and provincial marginal rate. Here is a rough comparison for someone at a 40% combined marginal rate:
- Interest: about 40% effective rate (100% included, no credits).
- Eligible Canadian dividends: roughly 15–25% effective rate depending on province.
- Non-eligible Canadian dividends: roughly 28–35% effective rate.
- Capital gains: about 20% effective rate (only 50% of the gain is included).
- Foreign dividends: about 40% effective rate before the foreign tax credit; the credit typically reduces this, but you still pay more than on Canadian dividends.
These figures shift with your income level and province. Investors in the lowest federal bracket sometimes pay effectively zero on eligible Canadian dividends, while those in the top bracket face combined marginal rates above 50% on interest.
How This Compares to a TFSA or RRSP
The tax cost of a non-registered account becomes clearest when you compare it to the registered alternatives. In a TFSA, investment income and gains are completely tax-free, and withdrawals do not affect your income. The 2026 contribution limit is $7,000, with unused room carrying forward from prior years.9Canada Revenue Agency. Calculate Your TFSA Contribution Room In an RRSP, contributions are tax-deductible and investments grow tax-deferred, but every dollar you withdraw is fully taxable as income.
Non-registered accounts have no contribution limits and no withdrawal restrictions, which is why investors use them once they have maxed out their TFSA and RRSP room. The trade-off is annual taxation on all realized income. A common strategy is to hold tax-inefficient investments (bonds, GICs, foreign dividend payers) inside registered accounts, and keep tax-efficient investments (Canadian dividend stocks, growth equities you plan to hold long-term) in the non-registered account. That asset location approach will not eliminate the tax, but it can substantially reduce it.
Tax Slips You Will Receive
Your financial institution handles most of the reporting work. Investment income from a non-registered account shows up on two types of tax slips:
- T5, Statement of Investment Income: issued for interest, dividends from mutual fund corporations, and other investment income paid directly by the financial institution.
- T3, Statement of Trust Income Allocations and Designations: issued for income from mutual fund trusts, ETFs structured as trusts, and segregated funds. The T3 breaks out capital gains, return of capital, Canadian dividends, foreign income, and interest into separate boxes.
Both slips show the grossed-up dividend amounts and the dividend tax credit, so you can transfer the figures directly to your return. Capital gains from selling individual stocks or ETFs are not reported on T3 or T5 slips. You track those yourself using your trade confirmations and report them on Schedule 3. Keeping your own records of every purchase, including reinvested distributions, is the only reliable way to make sure your adjusted cost base is correct at sale time.