Investment Income

There are several types of investment income which have to be reported on various lines in your T1 return. In this blog we will discuss each type of investment income and how they are reported on each line of the T1 return.

Lines 12000 and 12010 – Taxable amount of dividends from taxable Canadian corporations

If you have held shares of a Canadian corporation for more than one year, it is very likely that the corporation has declared and paid dividends for your share of the ownership in the corporation.

There are two types of dividends from a taxable Canadian corporation:

eligible dividends; and

other than eligible dividends.

An eligible dividend is any taxable dividend paid to a resident of Canada by a Canadian corporation that is designated by that corporation to be an eligible dividend. A corporation's capacity to pay eligible dividends depends mostly on its status (Source: Canada.ca). These corporations generally earn more than $500,000 or more per year.

Other than eligible dividend is any taxable dividend paid to a resident of Canada by a Canadian corporation that are not designated as eligible dividends and generally earn less than $500,000.

Before the dividends from an eligible or other than eligible dividend can be reported in your income, a gross-up rate needs to applied to them. Eligible dividends have a higher gross-up rate of 38%, while non-eligible dividends have a lower gross-up rate of 15%. This means that when you report your dividend income on your tax return, you’ll need to increase the amount you received by the respective gross-up rate. The purpose of the gross-up is to account for taxes already paid by the corporation. Dividends are usually shown on a T5 Slip, T4PS Slip, T3 Slip, or T5013 Slip.

Line 12100 – Interest and other investment income

You are required to report all interest and other investment income, foreign interest and dividend income received in the tax year. They are usually shown on your T5 slip, T3 slip, and Form T5013. The most common sources of interest are:

Bank accounts, term deposits, guaranteed investment certificates (GIC), and other similar investments

Canada savings bonds

Treasury bills

Earnings on life insurance policies

Foreign income

Banks and other financial institutions do not issue a T5 if the investment income was less that $50. You are still required to report the income even if you have not received a T5. Taxpayers are also required to report the interest on any refunds received during the tax year. Since The CRA does not issue a slip for the interest earned, the amount of the interest will be reflected in the individual’s Notice of (Re)Assessment.

Line 12700 – Taxable capital gains

Capital gain or loss from selling investments or other capital property, which are usually derived from information slips, are reported on Schedule 3. You are required to report the disposition of capital property in the calendar year (January to December) the property/investment was sold or considered to have been sold. Some of these slips are:

T3, Statement of Trust Income Allocations and Designations

T4PS, Statement of Employee Profit-Sharing Plan Allocations and Payments

T5, Statement of Investment Income

T5008, Statement of Securities Transactions

T5013, Statement of Partnership Income

You are considered to have sold a property when one of the following events occur (source: canada.ca):

You exchange one property for another

You give property (other than cash) as a gift

Shares or other securities in your name are converted

You settle or cancel a debt owed to you

You transfer certain property to a trust

Your property is expropriated

Your property is stolen

Your property is destroyed

An option that you hold to buy or sell property expires

A corporation redeems or cancels shares or other securities that you hold

You change all or part of the property's use

You leave Canada

The owner of the capital property dies

Calculating the capital gain and loss is relatively a simple process. To calculate any capital gain or loss, we need to know the following three amounts:

Proceeds of disposition: The amount you sold the capital property.

Adjusted cost base (ACB): This is the amount you paid to acquire the property plus any expenses incurred in during the acquisition process such as commissions and brokerage fees. ACB also includes capital expenditures to improve a property (such as adding a new roof to a house) but it can not include upkeep and routine expenses such as utilities and property taxes.

Outlays and expenses incurred to sell your property

Formula for calculating your capital gain (loss) is:

Capital Gain (Loss) = Proceeds of Disposition – (ACB + Outlays and Expenses)

You can carry capital losses indefinitely and offset against your capital gains anytime in the future. Alternatively, you can carry back your capital losses to any of the three (3) preceding tax years to be applied to capital gains in those years. There is no requirement to apply the capital losses to capital gains in the year capital gains arise.

For further information or if you need to prepare a will, please visit the nearest Softron office or contact Softron at:

Telephone: 1-877-SOFTRON, Website: www.softrontax.com