Of all the types of investment income Canadians earn in non-registered accounts, capital gains and dividends receive the most favourable tax treatment — but they are not taxed the same way. The difference can meaningfully affect how much of your investment return you actually keep.
The two types of dividends in Canada
Eligible dividends are paid by publicly traded Canadian corporations and qualifying Canadian-controlled private corporations (CCPCs) that pay tax at the general corporate rate. They receive the most favourable tax treatment of any investment income.
Non-eligible dividends are paid by CCPCs that pay tax at the small business rate on their first $500,000 of active business income. These are taxed less favourably than eligible dividends, though still better than interest income.
Most dividends from Canadian bank stocks, large publicly traded companies, and REITs are eligible dividends. Private company dividends from a CCPC are typically non-eligible.
How dividends are taxed in Canada
Canada uses a gross-up and tax credit system designed to prevent double taxation. Since the corporation already paid corporate income tax on its profits, the dividend tax credit (DTC) partially offsets the individual shareholder’s tax on the same money.
Eligible dividends
- Gross up the dividend by 38% — a $1,000 dividend becomes $1,380 of taxable income
- Calculate income tax on $1,380 at your marginal rate
- Subtract the federal DTC: 15.02% of the grossed-up amount (~$207 credit per $1,000 received)
- Subtract the provincial DTC — varies by province, typically 10–13%
Non-eligible dividends
- Gross up by 15% — a $1,000 dividend becomes $1,150 of taxable income
- Subtract the federal DTC: 9.03% of the grossed-up amount (~$104 credit per $1,000 received)
- Provincial DTC is lower than for eligible dividends
For a line-by-line breakdown of the credit calculation, see our Canadian dividend tax credit guide.
How capital gains are taxed in Canada
A capital gain arises when you sell an asset for more than its adjusted cost base (ACB). Only a portion of that gain is included in your taxable income — this is the inclusion rate.
For 2026:
- Individuals: 50% inclusion on net capital gains up to $250,000 per year; 66.67% on the portion above $250,000
- Corporations and trusts: 66.67% inclusion on all capital gains
A $20,000 capital gain adds only $10,000 to your taxable income (at the 50% rate). Tax is then calculated at your marginal rate on that $10,000 — not the full $20,000.
For full details on current rates, see capital gains inclusion rate — Canada.
Dividend tax vs. capital gains: side-by-side
The table below shows approximate combined federal and Ontario provincial tax rates on $10,000 of each income type at different income levels. Other provinces will differ, particularly Quebec (higher) and Alberta (lower).
| Income Type | ~$75,000 income | ~$120,000 income | ~$200,000 income |
|---|---|---|---|
| Interest income | ~31% | ~40% | ~46% |
| Non-eligible dividends | ~21% | ~33% | ~41% |
| Capital gains (first $250K) | ~15% | ~20% | ~27% |
| Eligible dividends | ~2–6% | ~13% | ~25% |
Key takeaway: Eligible dividends are typically the most tax-efficient at lower and middle income levels. Capital gains are competitive across all income levels and become relatively more efficient than eligible dividends above roughly $150,000, because the dividend gross-up pushes taxable income higher as marginal rates increase.
Which is more tax-efficient at your income level?
Under ~$50,000
The dividend tax credit can fully offset federal tax on eligible dividends at lower incomes. A person receiving $50,000 of eligible dividends may owe very little or no federal tax at all. Capital gains at 50% inclusion are also efficient, but eligible dividends often outperform them at this range.
$50,000–$150,000
Capital gains and eligible dividends are closely matched. Capital gains have the edge in provinces like Quebec where the provincial DTC is less generous. In Alberta, eligible dividends remain strong through this range due to the province’s flat 10% rate on the first $148,000.
$150,000+
At higher marginal rates, the dividend gross-up amplifies taxable income substantially, reducing the DTC’s benefit. Capital gains at the 50% inclusion rate typically become more efficient. For gains above $250,000, the 66.67% inclusion rate narrows the gap again.
How account type changes the picture
The dividend vs. capital gains distinction matters only in non-registered accounts:
- RRSP: All investment income — dividends, capital gains, interest — grows tax-deferred inside the RRSP. All withdrawals are taxed as ordinary income regardless of the original source. The distinction between income types disappears inside a registered account.
- TFSA: All investment income is completely tax-free. Capital gains, dividends, and interest are all treated equally — none are taxed. The TFSA shelters both equally well.
- Non-registered account: This is where the dividend vs. capital gains distinction has real impact. Structure your holdings strategically: Canadian dividend-paying stocks can leverage the DTC here; high-growth stocks held for capital gains also work well.
One additional consideration for non-registered accounts holding US stocks: the US withholds 15% tax on dividends paid to Canadian residents under the Canada–US tax treaty. This withholding is recoverable as a foreign tax credit on your Canadian return, but still creates friction. Holding US dividend stocks in an RRSP eliminates this withholding entirely. See US dividend withholding tax in RRSP.
Tax-loss harvesting and capital losses
Capital gains treatment has one advantage dividends do not: the ability to use capital losses to reduce taxes. If you sell an investment at a loss, that loss can be applied against capital gains from the same year, the prior three years, or any future year indefinitely.
This strategy — tax-loss harvesting — is not available for dividend income, which simply adds to taxable income in the year received. See our tax-loss harvesting guide and superficial loss rules for how to use losses without triggering the 30-day repurchase rule.
FAQ
Are eligible dividends always taxed at a lower rate than capital gains?
Not always. At high income levels — typically above $150,000 in most provinces — capital gains at the 50% inclusion rate are often more efficient than eligible dividends. The gross-up mechanism increases taxable income, which can push other income into higher brackets and reduce the net value of the DTC.
Do I pay capital gains tax every year on my investments?
No. Capital gains tax is only triggered when you actually sell (or are deemed to have sold) an asset. Unrealized gains accumulate in your portfolio tax-free until disposition.
What is the difference between a capital dividend and a regular dividend?
A capital dividend is paid from a corporation’s capital dividend account (CDA), which holds the non-taxable portion of capital gains realized inside the corporation. Capital dividends are received tax-free by the shareholder and are a private corporation tax planning tool — not available from publicly traded companies.
How do I report dividends and capital gains on my Canadian tax return?
Canadian eligible and non-eligible dividends are reported using information from your T5 slip. Capital gains and losses from securities are reported on Schedule 3. Your broker typically issues a T5008 slip for dispositions and a T3 or T5 for investment income by February or March following the tax year.
What about interest income — where does it rank?
Interest income (from savings accounts, GICs, bonds) is the least tax-efficient investment income in Canada. It is fully included in taxable income at your marginal rate — the same treatment as employment income. This is why financial planners generally recommend holding interest-bearing investments inside TFSAs or RRSPs first, and keeping capital-gains-oriented investments in non-registered accounts.