Passive Income Tax in Canada: Rules, Rates & Reporting

Passive income in Canada commonly includes interest, dividends, rental income and capital gains. Each type of income can be taxed differently depending on factors such as your total income, province or territory of residence, and how you hold the underlying assets. Understanding those differences can help you structure investments to improve after‑tax returns and avoid unexpected tax consequences.

Income in non-registered accounts

Investment income earned in taxable, non‑registered accounts must be reported on your T1 tax return each year. Different income types face different tax treatments:

Interest and foreign dividends are taxed at your marginal tax rate in the same way as employment income. For example, at $100,000 of taxable income in Ontario, interest or foreign dividends are typically taxed at roughly 31%.
Canadian dividends receive preferential tax treatment through the dividend gross‑up and tax credit mechanism. At the same $income level in Ontario, the effective tax on eligible Canadian dividends can be around 9%, meaning investors retain a larger share of dividend income from Canadian companies.
Capital gains are taxed favourably because only 50% of a capital gain is included in taxable income. That makes capital gains more tax‑efficient than interest. For a taxpayer with $100,000 in taxable income in Ontario, the effective tax on a realized capital gain can be around 16%. Note that large gains may push you into higher tax brackets and increase the tax paid on the incremental income.

Be aware that some mutual funds, ETFs, real estate investment trusts (REITs) or limited partnerships may distribute capital gains to investors even if the investor did not personally sell holdings. Those internal disposals will be reported on a T3 slip and are taxable in the year they are allocated.

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Income from corporations

Corporations face different tax rules for passive income versus individuals. Corporate passive investment income is generally taxed at a relatively flat rate regardless of the dollar amount, unlike personal marginal tax brackets.

One important interaction to note: if a corporation’s passive investment income exceeds $50,000 in a year, the small business deduction is gradually reduced. For every $5 of passive income above that threshold, the small business deduction is cut by $1, which can result in a higher effective tax rate on a corporation’s active business income.

Typical corporate tax rates on investment income vary by province, generally falling between about 47% and 55% for interest, foreign dividends and rental income. Canadian dividend income received by a corporation is usually taxed at a lower effective rate—around 38%—and dividends paid between related corporations may be tax‑free in certain situations (for example, when paid from an operating company to a holding company).

Capital gains realized inside a corporation follow the same inclusion rate as for individuals (50% inclusion), so the corporate tax on capital gains generally ranges from roughly 23% to 27%, depending on the province.

Rental income

Rental income is taxable both personally and corporately at the applicable rates—personally at your marginal rate and corporately at the rates described above. Importantly, only net rental income is taxable: you may deduct eligible expenses such as mortgage interest, property taxes, insurance, utilities, condo fees, professional fees, repairs and other operating costs when calculating net rental income.

Income in an RRSP

Registered Retirement Savings Plan (RRSP) accounts are tax‑deferred: investment growth inside an RRSP is not taxed while it remains in the plan, and tax is payable on withdrawals. However, some foreign withholding taxes can reduce returns inside registered accounts. Dividends from certain foreign jurisdictions are subject to withholding taxes—often 15% to 30%—before the income reaches your RRSP or a fund held within it.

The impact of foreign withholding tax depends on the account type. In a taxable account you can generally claim a foreign tax credit to avoid double taxation, but inside an RRSP that credit is not available, so the withholding tax becomes a real cost to returns. One notable exception is U.S. dividends: under the Canada‑U.S. tax treaty, dividends from U.S. stocks held directly in an RRSP are typically exempt from U.S. withholding tax. By contrast, U.S‑source dividends paid to Canadian funds or ETFs that hold U.S. stocks may still incur the 15% withholding at the fund level.

Income in a TFSA

Tax‑Free Savings Account (TFSA) income—interest, dividends and capital gains—is generally tax‑free, and withdrawals are tax‑free as well. However, foreign withholding taxes still apply to investments held in a TFSA. Unlike an RRSP, a TFSA does not benefit from treaty relief for U.S. dividends, so U.S. source dividends held in a TFSA are subject to withholding tax (commonly 15%), and other jurisdictions may levy withholding up to 30%.

Another caveat: if you are actively trading in a TFSA to the extent that the Canada Revenue Agency views your activity as carrying on a business, profits from that trading may be taxed as business income rather than tax‑free investment income.

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Attribution rules

Canada’s attribution rules can transfer the tax burden of investment income from the recipient back to the original transferor in certain situations involving gifts, loans or other transfers. A common example is when a higher‑income spouse gives cash or assets to a lower‑income spouse to invest: spousal attribution can cause the investment income (interest, dividends and rental income) to be taxed in the hands of the spouse who provided the funds, not the investor spouse. Registered accounts such as RRSPs and TFSAs are generally exempt from attribution.

Attribution can also apply to transfers to minor children. Interest and dividends earned by an account funded by a parent can be attributed back to the parent and taxed to them, although capital gains realized in the child’s name are usually taxed to the child. Contributions to a registered education savings plan (RESP) are an exception designed specifically to benefit a child’s education.

How passive income is taxed in Canada

In summary, passive income in Canada is treated very differently depending on the income type, the account that holds the investment, whether the owner is an individual or a corporation, and the provincial tax environment. Interest and foreign dividends are generally taxed at full marginal rates for individuals, Canadian dividends receive preferential treatment, capital gains enjoy a 50% inclusion rate, and rental income is taxable only on net profit. Corporations face their own rate structure and interactions with the small business deduction. Tax‑sheltered accounts like RRSPs and TFSAs can shelter investment growth, but withholding taxes and attribution rules can still affect outcomes.

Knowing these rules helps investors choose the right account for each asset, manage withholding exposure, and organize holdings to maximise after‑tax returns while staying compliant.