Is the interest earned on a savings account taxable in Canada?

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When you file your income tax return at the end of each financial year, you’ll need to declare all of your sources of income, including your salary and income earned from investments, as well as any interest you’ve earned from deposits in savings accounts. Read on to find out at what rate earned interest is taxed and learn how you can you get the best possible returns from a savings account.

Is interest earned from a savings account taxable?

Yes, interest earned on your savings is taxable by law. You won’t need to pay tax on the amount you deposit into your account because you’ve already paid income tax on it. However, any interest accrued on your deposit is considered general income and is subject to taxation during the same year that you receive it. It will be taxed at the marginal rate, which is the same rate you pay on your income.

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How is interest income taxed in Canada?

The amount of tax that applies to the interest you earn on your savings account will be determined by the total amount of income you make from all sources in a given calendar year. This determines the tax bracket you fall into and the percentage of your income you’ll be required to remit to the CRA. Of course, if you qualify for any tax deductions or credits, you won’t have to pay as much.

Income tax is the sum of both federal and provincial taxes, both of which are broken down below for the 2020 tax year:

Source: Canadian income tax rates for individuals – current and previous years, Government of Canada website.

Why do I need to declare interest?

The CRA requires you by law to declare interest and other forms of investment income on line 121 of your personal tax return. Banks and other investment organizations are also required to report the details of the interest they pay to account holders and investors to the CRA. The CRA then verifies the investment income you report with the amount reported by your bank, and if there are any discrepancies, your tax return will be adjusted and fines may apply.

Who pays tax on joint accounts?

The CRA requires joint account holders to declare interest income according to how much each account holder contributed to the account. So, if you have a joint savings account with your spouse and you both contributed equally, the interest paid will be divided equally between the 2 account holders – 50% to one and 50% to the other. On the other hand, if 60% of the contributions made to the account were made by you and only 40% were made by your spouse, then you would declare 60% of the interest earned on your tax return and your spouse would report 40% on line 121 of his or her T1 tax return.

The CRA knows whose names are on the savings account, but it doesn’t know how much money each account holder contributed. Therefore, one T5 form will be sent out for the full amount of interest earned on the account. Each account holder is individually responsible for declaring the right amounts on his or her tax return.

Note that the T5 will have both account holders’ names listed, but only 1 SIN. A recipient indicator on the slip tells the CRA that the account is jointly held, so both account holders can file their tax returns based on the information from the slip.

Do I have to pay tax if I transfer funds out of my savings account?

Transferring interest income out of a savings account doesn’t affect the taxability of that income. This is true even if you transfer funds into a tax-sheltered account like a Tax-Free Savings Account (TFSA). Interest becomes taxable when it’s earned, regardless of what you do with the funds afterwards. To be tax-free, interest has to have been earned while funds are held in a tax-sheltered account.

Note that you don’t have to pay income tax on funds withdrawn from a TFSA (assuming you haven’t met or exceeded your yearly TFSA contribution limit). But if you put those funds into a regular savings account and it begins to earn interest, that interest becomes taxable.

What about interest earned on a children’s savings account?

One common point of misunderstanding for many Canadian taxpayers is the income tax requirements surrounding a child’s savings account. If a parent provides the funds for the child’s account, any money made off that gift or investment is considered “first-generation income” and is attributed to the parent as part of his or her income. The parent then pays income tax on this along with all other sources of his or her income. This is to deter parents from skirting income tax payments by giving to their children.

Money subsequently made on the amount given to the child is considered “second-generation income” and is attributed to the child.

Contrary to popular belief, children can be required to pay income tax if the amount of income they make in their name from all sources (investments, income from a part-time job, business interest held in his or her name etc.) reaches a taxable threshold.

If you want to give your child a monetary gift, but don’t want to be stuck paying income tax on it, you can always hold the gift until the child is 18. Then you can transfer the money without worrying about paying first-generation income tax. Read our guide to youth savings accounts to learn more about getting your child started on the path the savings including account options, tax rules and the impact of saving from an early age.

How do I find the best savings accounts for my tax needs?

• Check interest rates. The rate of interest will obviously play a huge role in determining how quickly you can grow your savings balance. Compare interest rates between accounts to see which ones offer the best deal.
• Watch out for traps. Keep an eye out for some common traps attached to savings accounts. For example, an account may only offer the high interest rate advertised for a limited introductory period, or you may need to satisfy specific criteria (for example depositing a certain amount each month or maintaining a minimum balance) to earn the maximum rate of interest.
• Look at all the account features. The interest rate isn’t the only factor that affects whether or not a savings account is right for you. Check for hidden fees and charges, whether you are able to access your funds at any time and how you can manage your account.
• Consider inflation. When considering the returns provided by a savings account, remember to take into account inflation as well as the tax you need to pay on interest. Factoring in the effects of inflation increases the overall tax rate on your savings balance, so it’s important to shop around for an account with a high rate of interest.
• Compare your options. With so many institutions and products available, it’s important to compare your options to find one that suits your financial needs. Start comparing a range of accounts today, or see our lists of the best savings accounts by specific features.
• Consider another account type that earns more. Savings accounts are low risk and low reward. If you don’t need the funds to be liquid and you are comfortable taking on more risk, you may want to look into investment accounts to trade yourself or have a robo-advisor invest for you.

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Bottom line

Just like any other type of income you earn, you’ll need to pay tax on the interest you receive from savings accounts. However, the amount of tax you’ll pay depends on your annual income, the way your account is set up and when your interest is paid. Compare your savings account options to find a savings account that suits your needs, then speak with a tax accountant or a lawyer who specializes in tax law for more details on how savings account interest will affect your income tax return.