Earning $10,000: Why Dividends, Interest and Capital Gains Are Taxed Differently

How three kinds of investment income are taxed, the dividend tax credit

Scott Tang, CPAUpdated 2026-11-052026 rules5 min read

Say you earn $10,000 from investments. Depending on whether it comes as interest, as dividends from a Canadian company or as a profit on selling shares, the tax on one can be twice the tax on another. That's because Canada taxes these three kinds of investment income differently: interest is fully taxed, only half of a capital gain is taxed, and dividends from Canadian companies come with a tax credit.

about 53.5%

Interest: top marginal rate for an Ontario resident in 2026 (for illustration)

about 26.8%

Capital gains: only half is included in income

about 39.3%

Eligible dividends: grossed up, then the dividend tax credit applies

about 47.7%

Non-eligible dividends (what most small businesses pay); Ontario is reducing the credit from 2027, bringing it to about 48.9%

How much of $10,000 counts as income

Interest

The full $10,000 is included

Taxed at your marginal rate

The same for interest on deposits, GICs and bonds

Capital gains

Half of $10,000 = $5,000 is included

Taxed at your marginal rate

Profits on selling shares, funds or investment property

Eligible dividends

$10,000 grossed up by 38% = $13,800 is included

Then the dividend tax credit is deducted

The credit is there because the company has already paid corporate income tax

The differences in one table

Item	Interest	Capital gainsRecommended	Eligible dividends (designated by a Canadian-resident corporation)	Foreign dividends
Included in income	100%	50%	Included after a 38% gross-up	100%
Dividend tax credit	None	None	Yes, both federal and provincial	None
Foreign tax withheld	—	—	—	If you qualify, you can claim a foreign tax credit (up to 15%)
When it's taxed	Each year, as received or accrued	When you actually sell or are deemed to sell	When received	When received

In a non-registered account, tax on gains you haven't sold can usually be deferred until you actually sell or are deemed to sell (death, leaving Canada and giving the investment away can all be deemed sales; a fund's year-end distributions may still be taxable in that year). Interest and dividends have to be reported every year.

Why dividends are grossed up and then credited

A company has already paid corporate income tax on its profits. Taxing the full dividend again at personal rates when it is paid out to shareholders would tax the same money twice. The gross-up and credit are designed so that the overall tax on money earned through a company is roughly the same as on money you earn directly. So:

Dividends from listed companies
Most are eligible dividends: grossed up by 38%, with a larger credit.
Dividends from small businesses
Most are non-eligible dividends: grossed up by 15%, with a smaller credit — because the company paid tax at the lower small business rate; Ontario reduces this credit further from January 1, 2027.
Dividends from foreign companies
No dividend tax credit, and fully taxable; you can claim a foreign tax credit for tax withheld abroad.

Points to watch

The rate depends on your total income
The figures above are rough numbers for the top bracket. For people with lower incomes, the rate on eligible dividends can be very low or even negative, and the gaps between the three change.
Dividends push up your "net income"
Eligible dividends are included in net income after the gross-up, which can affect benefits calculated on net income, such as the OAS clawback.
Registered accounts work differently
Income earned inside an RRSP or TFSA isn't taxed in the year it's earned; RRSP withdrawals are fully taxed as ordinary income, whether the money came from interest or dividends.
Tax isn't everything
When choosing investments, look at risk and return first; this article covers only the tax treatment.

How Sheng Qian CPA can help

Your mix of investment income
Based on your income and accounts, we work out the actual tax on your interest, dividends and capital gains.
Accounts and investments together
We look at which investments to hold in registered accounts and which in non-registered accounts, arranging them together from a tax point of view.
Reporting it right each year
We report your T3, T5 and T5008 slips together with income from foreign brokerages; for prices, see "What Sheng Qian CPA Can Do for Investors: Tax Returns, Accounts and Annual Planning" in this series.

Sources

Disclaimer

This article is general information only and is not tax or investment advice. Everyone's situation is different; please consult a CPA about your specific arrangements. Service fees are as set out in our written quote.