Three investors each earn $1,000. One pays $296 of tax, one pays $148, and one pays $64. They earned it in different forms, and that is the entire difference.
In a taxable Canadian account, interest is 100% included and taxed at your full marginal rate. Capital gains have a 50% inclusion rate and are taxed only when you sell. Eligible dividends are grossed up 38% and then reduced by the dividend tax credit. At an $80,000 Ontario income, $1,000 of each leaves you with $703.50, $851.70 and $936.10 respectively.
This lesson only matters in a non-registered (taxable) account. Inside a TFSA nothing here applies; inside an RRSP everything is taxed identically as ordinary income on withdrawal. It is in taxable accounts that the form of your income starts to determine how much you keep.
Interest from savings accounts, GICs, bonds and money-market funds is 100% included in taxable income and taxed at your full marginal rate. There is no credit, no discount, and no deferral: it is taxed in the year it is earned, whether or not you withdraw it.
A capital gain is the increase in an asset's value between purchase and sale. Only 50% of the gain is included in taxable income, so the effective rate is exactly half your marginal rate.
The second advantage is easy to miss and often worth more: a gain is taxed only when realised. Until you sell, the unrealised gain compounds untaxed. That deferral is effectively an interest-free loan from the government that keeps growing, and it is a structural argument for buy-and-hold over frequent trading — every sale converts a deferred liability into a paid one.
Your adjusted cost base (ACB) is the total you paid, including commissions, averaged across all purchases of the same security. If you buy in several instalments — which anyone contributing monthly does — you must track the average, not the most recent price. Reinvested distributions also increase your ACB, and failing to add them is one of the most common ways Canadians accidentally overpay tax on a sale.
Dividends from Canadian public corporations are usually eligible dividends, and their treatment looks bizarre until you know why it exists. The company has already paid corporate tax on those profits. Taxing you again at full rates would be double taxation, so the system tries to neutralise it:
The result is a low effective rate on eligible dividends — and at low incomes it goes negative, meaning the credit exceeds the tax owing and can reduce tax on your other income. In Ontario for 2026, someone in the lowest bracket faces an effective eligible-dividend rate of −8.24%.
Dividends from small private Canadian corporations are non-eligible dividends, with a smaller gross-up and a smaller credit, so they are taxed more heavily than eligible ones but still better than interest. Foreign dividends receive no credit at all and are taxed exactly like interest — a fact that matters enormously in Lesson 6.3.
| Taxable income | $1,000 interest | $1,000 capital gain | $1,000 eligible dividend |
|---|---|---|---|
| ~$50,000 | $809.50 | $904.70 | $1,082.40 |
| ~$80,000 | $703.50 | $851.70 | $936.10 |
| ~$160,000 | $550.30 | $775.20 | $724.70 |
At $50,000, the eligible dividend leaves you with more than you received, because the dividend tax credit exceeds the tax owing and reduces tax on your other income.
Notice what happens at $160,000: capital gains overtake eligible dividends. The dividend tax credit is a roughly fixed benefit, while the 50% inclusion rate is a proportional one — so gains win as rates rise. This reverses the common belief that dividends are always the most tax-efficient income.
Your marginal rate is the tax on your next dollar. Your average rate is total tax divided by total income. They are always different, because Canada's system is progressive: each bracket's rate applies only to the income inside that bracket.
Someone earning $58,000 in Ontario is offered a raise to $60,000, and worries about being "pushed into a higher bracket."
The federal bracket boundary sits at $58,523. Only the $1,477 above that line is taxed at the higher rate. The first $58,523 continues to be taxed exactly as before.
Income tax alone never makes a raise a net loss. But income-tested benefits can. The Canada Child Benefit, GIS and the OAS recovery tax all reduce as income rises, and stacking a benefit clawback on top of a marginal rate can produce very high effective rates — sometimes over 60% — in specific income ranges. This is a real effect that matters for families with young children and for retirees, and it is why Lesson 8.1 treats the GIS clawback as seriously as it does. It is not, however, the thing people mean when they say a raise pushed them into a worse position.
A capital loss arises when you sell for less than your adjusted cost base. Losses are useful, but only against gains:
Tax-loss selling is the deliberate realisation of a loss to offset gains you have already taken. Done in December, it can meaningfully reduce a tax bill. Two mechanical points: the trade must settle within the calendar year, so the practical deadline is a day or two before December 31 under T+1 settlement (Lesson 4.4) — and it does nothing at all inside a TFSA or RRSP, where losses are simply lost.
"Affiliated" is broad: it includes your spouse or common-law partner, a corporation you control, and — critically — your own RRSP or TFSA. Selling at a loss in a taxable account and buying the same fund inside your TFSA the next day denies the loss permanently, because it can never be added to a TFSA's cost base.
The usual workaround is to buy a similar but not identical security — a different provider's broad-market ETF tracking a different index, for example — which keeps you invested while allowing the loss. Just be sure it is genuinely a different security, and consider getting advice if the amounts are significant.
One last mechanical warning worth more than it sounds: if you hold US-listed securities, the gain must be calculated in Canadian dollars using the exchange rate on each transaction date. A US stock that went nowhere in USD can produce a large taxable Canadian gain purely from currency movement — or a deductible loss. Lesson 6.3 returns to this, and the Capital Gains Calculator handles the arithmetic.
Only 50% of a capital gain is included in taxable income, so the effective rate is half your marginal rate — about 14.83% at an $80,000 Ontario income for 2026. Gains are taxed only when you sell, so an unrealised gain compounds tax-deferred indefinitely. Your gain is proceeds minus adjusted cost base minus selling costs, and the ACB is the average of all your purchases including commissions and reinvested distributions.
It depends on your income. At low and middle incomes, eligible Canadian dividends are the most tax-efficient — at around $50,000 in Ontario the effective rate is actually negative because the dividend tax credit exceeds the tax owing. But above roughly $150,000 capital gains overtake dividends, because the 50% inclusion rate scales with your rate while the dividend credit is a roughly fixed benefit. Capital gains also carry the deferral advantage, which dividends do not.
If you sell a security at a loss and you or an affiliated person buys the identical security within 30 days before or after the sale and still holds it at the end of that window, the loss is denied and added to the cost base of the repurchase instead. Affiliated persons include your spouse and your own RRSP and TFSA — so selling at a loss in a taxable account and rebuying inside your TFSA destroys the loss permanently, since it can never attach to a TFSA cost base.
Model a real sale — including the adjusted cost base across several purchases — and see the actual tax owing at your marginal rate rather than guessing at it.
Educational purposes only — not financial, investment or tax advice. RiskStock is not a registered dealer, adviser, or tax professional. Nothing in this course is a recommendation to buy or sell any security or product. Tax and benefit figures are for the 2026 tax year, were verified against official sources on 2026-07-27, and change annually — confirm your own numbers with the CRA and a qualified professional before acting.