How to Reflect Investment Income and Capital Gains/Losses on your Personal Tax Return

Capital Gains and Losses

• A disposal of investments, which are not in the ordinary course of a taxpayers business, would be classified as a capital gain or loss.  Capital gains or losses can apply to securities, shares, mutual funds, bonds, rental property, land and other assets.  If you have an investment portfolio that supplements your income, where securities are bought or sold on an occasional basis then the income or loss will likely qualify for capital  gains or losses treatment.  If you trade frequently, eg. day traders or people whose primary source of income is derived from investments, you may have to reflect gains and losses as business income where the full amount of the gain is taxable.

•  Other than the T5 and T3 which reflect capital gains dividends and capital gains respectively on the slips, the T5008 is the primary tax form which shows that disposal of securities during the taxation year for the purposes of reporting capital gains and losses. This can be a little more complicated as often the T5008 does not show the cost (ACB-adjusted cost base) of the investments.  Rather it only shows the proceeds of disposition.  Many brokerages will provide a separate schedule that shows both the proceeds, cost, expenses and relevant capital gains for each security, however this is not always the case particularly if you have transferred investments from one brokerage to another.  If the cost is not readily available it has to be manually calculated by reviewing the costs of the investments on the date of the purchases.  This should be maintained in a spreadsheet for future reference along with backup (investment statements or broker confirmations).  If you buy the same investment on more than one occasion at different costs, you would take the weighted average of the costs to determine your adjusted cost base. This is only relevant if you sell a portion of the investment. You must have the cost of the investment to determine the gain, once you sell it.

• Once you have determined your capital gain or losses for investments that have been disposed of during the year, you would reflect each sale (disposition) on Schedule 3.  You must reflect the proceeds of disposition (how much you sold it for) and the adjusted cost base (the total cost of investments). The difference between the two will determine if you have a capital gain or loss.

• Capital losses can only be offset against capital gains.  If you do have capital losses, these can be carried back against income from the previous 3 years or they can be carried forward to apply against future capital losses, indefinitely. In other words, a capital loss incurred will reduce taxes that you pay on capital gains either for the previous 3 years or at any time in the future.

• Tax rates on capital gains are also based on your tax rate as a taxpayer.  However, capital gains income inclusion rate is only 50% of the total gain.  Eg.  A net gain of $100k (after deducting the cost and expenses) would result in income $50k that would then be taxed at your marginal tax rate is for the year of inclusion.  Note that a capital gain can result in an increase in your tax rate so it might make sense to defer a gain to a year where your income from other sources is lower.

  Note: The federal budget for 2024 has proposed to change the inclusion rate for capital gains from 50% to 66.67% for gains exceeding $250,000 for individuals. Please see this article for a better understanding of how this works

• Only realized gains are considered to be income for tax purposes, which is usually triggered by sale or disposition. A stock that has simply increased in value will not result in a capital gain unless sold or transferred to a third party or due to a “deemed dispositions” which arise under certain circumstances including when you cease to be a resident of Canada or upon death.

Carrying charges

When you have investments with a third party there are associated charges, fees and commissions some of which are deductible while others are not

Deductible Investment Fees (Carrying charges)

• Investment fees include those paid by you, the taxpayer, to your investment advisor and/or broker to manage your investments

• In some cases fees paid for investment advice are also deductible.

• Interest paid on funds borrowed to earn investment income and dividends.

NON Deductible Investment Fees/Interest Expense

• Any investment fees paid to advisors and brokers that relate to a registered account such as an RRSP, RRIF and TFSA are not deductible (since the income from these accounts is not taxable)

• Interest paid on funds borrowed to invest in RRSPs, RRIFs and TFSAs is not deductible

• Trading commissions and brokerage fees paid that are associated with buying and selling investments including stocks, bonds, ETFs and mutual funds are not deductible

• Fees for safety deposit boxes are not deductible

• Fees paid from the returns of your portfolio are not deductible including those reflected in the management expense ratio (MER). There has been some confusion over this recently since there is a requirement that all fees relating to an investment portfolio be reflected on your investment statement of account at the end of the year for transparency. However, only a portion of these fees are actually deductible as discussed above.

For additional information, see CRA’s guidance on carrying charges.

other points to consider

• Most tax software will allow you to go through an interview process or provide you with a section where you enter the information from each slip. Once this is entered, the software will automatically allocate it to the correct schedule which is primarily schedule 3 – capital gains and losses and schedule 4 – investment income

• Revenue Quebec has an equivalent tax slip and/or form for each CRA slip/form.  A useful list of CRA-RQ equivalent slips can be found on the DRTax website

• Tax rates on investment income are based on your marginal tax rate as a taxpayer.  There is no fixed investment tax rate for individual (non corporate) taxpayers.

• For taxpayers with foreign investments it is essential to determine if the total of these investments exceed $100,000 CAD. If this is the case you are required to complete a T1135 which is purely for informational purposes. Failure to submit this form by the deadline can result in significant interest and penalties.

• Carrying charges i.e. investment fees paid by the client to your investment advisor and/or broker to manage your investments or certain investment advice are deductible.

• Generally, you are not required to pay tax on sale of your principal residence (assuming you are not in the business of flipping). However, you are required to report the details of the sale on Schedule 3 of your tax return (most tax software will have a form that you can complete). If you do not report this, CRA might require that you pay tax on the sale.

When doing your tax return it is important to have an understanding of your investments and potential tax arising from any income received. If you have received income, bought or sold something during the year, there is a good chance that there are tax implications that I recommend doing some research on to ensure that you are onside.

Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals. She is the author of several books for small businesses and also provides financial consulting services.

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