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.
But at what rate is the interest taxed and how can you get the best possible investment returns from a savings account? Read on to find out.
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.
What is general income?
General income is income gained from sources other than capital gains. Capital gains are made when the value of property or other investments raises beyond its original purchase price.
An example of capital gains are the growth of stocks or real estate, which can raise in value because of market factors, the economy or a business’s performance and be sold to make money off of that increase in value (which represents a capital gain). In Canada, capital gains are only taxed when they are “realized,” or when you cash-in on your investment and sell it for a profit, not just when you hold an asset and it grows in value on paper alone. The CRA requires you to report 50% of realized capital gains as taxable income.
This is unlike savings accounts, where the inherent value of the money held in an account can never raise beyond what was deposited. Sure, the bank can take that money, invest it and subsequently produce a profit that is deposited back into the account. But this is merely profit from an investment that your money was used to make, not profit from your money just sitting there growing in value all by itself.
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:
- Other types of compensation from employment
- Net income from a sole proprietorship, corporation or cooperative
- Benefits including Old Age Security, CPP, pensions and other social benefits
- Gambling winnings if earned from a business (but not if earned from casual, hobby-level playing)
Click here to read more about types of income on the CRA’s website.Back to top
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 2019 tax year:
|Up to $47,63015
Between $47,630.01 – $95,259
(a span of about $47,629)
Between $95,259.01 – $147,667
(a span of about $52,408)
Between $147,667.01 – $210,371
(a span of about $62,704)
Source: Canadian income tax rates for individuals – current and previous years, Government of Canada website.
||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
||9.68% on the first $41,675 of taxable income, +
14.82% on the next $41,676, +
16.52% on the next $52,159, +
17.84% on the next $18,872, +
20.3% on the amount over $154,382
||15% on the first $43,055 of taxable income, +
20% on the next $43,050, +
24% on the next $18,660, +
25.75% on the amount over $104,765
||5.05% on the first $42,960 of taxable income, +
9.15% on the next $42,963, +
11.16% on the next $64,077, +
12.16% on the next $70,000, +
13.16 % on the amount over $220,000
||10.8% on the first $31,843 of taxable income, +
12.75% on the next $36,978, +
17.4% on the amount over $68,821
||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
||10% on the first $128,145 of taxable income, +
12% on the next $25,628, +
13% on the next $51,258, +
14% on the next $102,516, +
15% on the amount over $307,547
||5.06% on the first $39,676 of taxable income, +
7.7% on the next $39,677, +
10.5% on the next $11,754, +
12.29% on the next $19,523, +
14.7% on the next $39,370, +
16.8% on the amount over $150,000
||6.4% on the first $46,605 of taxable income, +
9% on the next $46,603, +
10.9% on the next $51,281, +
12.8% on the next $355,511, +
15% on the amount over $500,000
||5.9% on the first $42,209 of taxable income, +
8.6% on the next $42,211, +
12.2% on the next $52,828, +
14.05% on the amount over $137,248
||4% on the first $44,437 of taxable income, +
7% on the next $44,437, +
9% on the next $55,614, +
11.5% on the amount over $144,488
|Newfoundland and Labrador
||8.7% on the first $36,926 of taxable income, +
14.5% on the next $36,926, +
15.8% on the next $57,998, +
17.3% on the next $52,740, +
18.3% on the amount over $184,590
|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.
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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 $47,630, then 20.5% on the rest:
||($47,630 X 0.15) + [($64,850 – $47,630) X 0.205] = $7,144.50 + $3,530.10
Total federal tax: $10,674.60
|5.05% on the first $42,960, then 9.15% on the rest:
||($42,960 X 0.0505) + [($64,850 – $42,960) X 0.0915] = $2,169.48 + $2,002.94
Total provincial tax: $4,172.42
Total income tax due:
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 to declare interest and other forms of investment income on line 121 of your personal tax return. Types of investment income include:
- Interest from banks account including savings accounts and Guaranteed Investment Certificates (GICs) held with banks, credit unions and building societies.
- Canada savings bonds
- Treasury bills
- Earnings from invested portions of “participating” or “whole” life insurance policies
- Interest and dividends from foreign investments
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.
When you open a savings account, your bank may request your SIN.
Ordinarily, you don’t have to give your SIN to private sector organizations, even if they ask for it.
However, according to Section 2 of the Social Insurance Number Code of Practice, you have to provide your SIN if a private sector organization needs it to comply with government requirements, such as reporting your income or calculating taxes.
Because banks are required to report interest income to the CRA, you must provide your SIN when asked.
If you haven’t given your bank your SIN or if you’re a nonresident of Canada, the bank must withhold an amount from the interest you earn and send it straight to the CRA. To avoid withholding tax, you can either supply your SIN when you apply for an account or get in touch with your financial institution at any time to provide it via online banking, over the phone or at your nearest branch.Back to top
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 two 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.Back to top
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.Back to top
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.
Ask your accountant for help. For any advice on savings account interest and how it will affect your income tax return, ask your accountant or financial adviser for expert assistance.
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.Back to top