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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. This includes declaring 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 investment returns from a savings account
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.
General income is income gained from sources other than capital gains (which come from the growth of stock markets or real estate).
A such, interest income from money deposited into a savings account is not considered capital gains and is 100% taxable along with all your other general income.
According to the CRA, general income can come from a number of sources including:
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:
|2020 FEDERAL TAX RATE||INCOME|
|15%||Up to $48,535|
|20.5%||On the next $48,535 (on income between $48,535 up to $97,069)|
|26%||On the next $53,404 (on income between $97,069 up to $150,473)|
|29%||On the next $63,895 (on income between 150,473 up to $214,368)|
Source: Canadian income tax rates for individuals – current and previous years, Government of Canada website.
|PROVINCE||2020 PROVINCIAL TAX RATE|
|Nova Scotia||8.79% on the first $29,590 of taxable income, +|
14.95% on the next $29,590, +
16.67% on the next $33,820, +
17.5% on the next $57,000, +
21% on the amount over $150,000
|New Brunswick||9.68% on the first $43,401 of taxable income, +|
14.82% on the next $43,402, +
16.52% on the next $54,319, +
17.84% on the next $19,654, +
20.3% on the amount over $160,776
|Quebec||15% on the first $44,545|
20% on more than $44,545 but not more than $89,080
24% on more than $89,080 but not more than $108,390
25.75% on the amount over $108,390
|Ontario||5.05% on the first $44,740 of taxable income, +|
9.15% on the next $44,742, +
11.16% on the next $60,518, +
12.16% on the next $70,000, +
13.16 % on the amount over $220,000
|Manitoba||10.8% on the first $33,389 of taxable income, +|
12.75% on the next $38,775, +
17.4% on the amount over $72,164
|Saskatchewan||10.5% on the first $45,225 of taxable income, +|
12.5% on the next $83,989, +
14.5% on the amount over $129,214
|Alberta||10% on the first $131,220 of taxable income, +|
12% on the next $26,244, +
13% on the next $52,488, +
14% on the next $104,976, +
15% on the amount over $314,928
|British Columbia||5.06% on the first $41,725 of taxable income, +|
7.7% on the next $41,726, +
10.5% on the next $12,361, +
12.29% on the next $20,532, +
14.7% on the next $41,404, +
16.8% on the amount over $157,748
|Yukon||6.4% on the first $48,535 of taxable income, +|
9% on the next $48,534, +
10.9% on the next $54,404, +
12.8% on the next $349,527, +
15% on the amount over $500,000
|Northwest Territories||5.9% on the first $43,957 of taxable income, +|
8.6% on the next $43,959, +
12.2% on the next $55,016, +
14.05% on the amount over $142,932
|Nunavut||4% on the first $46,277 of taxable income, +|
7% on the next $46,278, +
9% on the next $57,918, +
11.5% on the amount over $150,473
|Newfoundland and Labrador||8.7% on the first $37,929 of taxable income, +|
14.5% on the next $37,929, +
15.8% on the next $59,574, +
17.3% on the next $54,172, +
18.3% on the amount over $189,604
|Prince Edward Island||9.8% on the first $31,984 of taxable income, +|
13.8% on the next $31,985, +
16.7% on the amount over $63,969
Source: 9.2.5 Provincial and territorial income tax, Government of Canada website.
If you live in Ontario and make $64,000 per year at your day job, but also have funds in a savings account that generated $850 in interest over the past year, then your total income for the year would be $64,000 + $850 = $64,850. Your income tax would be calculated as follows:
|15% on the first $48,535, then 20.5% on the rest:||($48,535 X 0.15) + [($64,850 – $48,535) X 0.205] = $7,280.25 + $3,344.57|
Total federal tax: $10,624.82
|5.05% on the first $44,740, then 9.15% on the rest:||($44,740 X 0.0505) + [($64,850 – $44,740) X 0.0915] = $2259.37 + $1,840.06|
Total provincial tax: $4,099.43
|Total income tax due: ||$14,724.25|
Note that the totals listed reflect do not take into account CPP, E.I. or any tax credits or deductibles you may be eligible to claim. So the actual amount you’d end up paying would be different. This is just to give you an idea of how interest income fits into Canada’s overall income tax calculation scheme.
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.
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.
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.
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.
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 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.
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