Taxes don’t need to be scary, but ignoring them can quietly drag down your returns. A simple tax foundation helps you decide which account to use (TFSA, RRSP, taxable), how often to trade, and how to keep more of what you earn.

4.1 Three Ways Investment Income Is Taxed

In a regular (taxable) account, Canada taxes investment income in three main ways:

• Interest
  • Paid by savings accounts, GICs, bonds.
  • 100% of interest is taxed at your full marginal rate (like salary).
• Dividends
  • Paid by many Canadian companies (e.g., banks, utilities).
  • Eligible Canadian dividends get a dividend tax credit, so they’re usually taxed less than interest at the same income level.
• Capital gains
  • Profit when you sell an investment for more than you paid.
  • Only a portion of the gain is included in taxable income; for most individual investors, the effective inclusion rate remains 50% on typical annual gains levels as of early 2026, with higher inclusion proposed only on very large gains.

Simple example (taxable account):

• Buy at $1,000, sell at $1,600 → $600 capital gain.
• Roughly half of that gain is included in your taxable income under current rules for ordinary investors.

This is why long-term buy-and-hold (fewer realized gains) is usually more tax-efficient than frequent trading in a taxable account.

4.2 TFSA: Tax-Free Growth (If You Respect the Rules)

The Tax-Free Savings Account is one of your most powerful tools as a Canadian investor.

Key points:

• You contribute after-tax money (no deduction up front).
• All growth (interest, dividends, capital gains) inside the TFSA is tax-free, and withdrawals are tax-free.
• Contribution room =
  • Annual limit set by the government,
  • Plus unused room carried forward,
  • Plus amounts you withdrew in previous years (added back the following January).

Contribution limits:

• The annual TFSA limit for 2025 is $7,000 (and 2026 is expected to be similar), and total lifetime room depends on your age and prior years’ limits.