Canada Investment Accounts and Tax Forms

One of the common questions I see from beginners on the Blossom App is what account to open and how their investment activities are taxed. In this post, I explain the different types of investment accounts available in Canada, the tax treatment of those accounts, and the different tax forms that you can expect to receive from your brokerage.

In Canada, you can always open and contribute any amount into a taxable investment account. But there are 4 types of tax-advantaged investment accounts with contribution limits:

• Tax-Free Savings Account (TFSA)
• Registered Retirement Savings Plan (RRSP)
• First Home Savings Account (FHSA)
• Registered Education Savings Plan (RESP)

In this post, I will only cover the first two.

Tax-Free Savings Account (TFSA)

A tax-free savings account, or TFSA, is the most tax-advantaged investment account available in Canada. Any amount withdrawn from a TFSA is not taxed. Thus it’s great for high growth stocks because any equity growth is free of tax. But don’t go day trading in your TFSA. The Canada Revenue Agency (CRA) will notice and treat the trading activity in your TFSA as business income subject to tax [1].

There is an annual contribution limit for the TFSA [2]. In 2023, the contribution limit is $6,500. You gain contribution room every year since 2009 or when you turn 18, whichever is later. You do not need to file a tax return in order to acquire contribution room.

You will not receive a tax receipt from your brokerage for TFSA contributions. However, your brokerage will report your contribution to the CRA. While you can log onto the CRA website to see your TFSA contribution room, ultimately you are responsible for tracking your own TFSA contribution room. The penalty for over-contributing to a TFSA is 1% of the excess in a month, for every month where there is an over-contribution.

You may withdraw from a TFSA at any time without penalty. However, the amount of contribution room does not increase by the withdrawn amount until the next year. The only way to re-contribute the withdrawn amount within the same year is if you have enough contribution room available.

A TFSA is not a good place to invest in dividend-paying US securities and ETFs. Dividends from US securities and ETFs have a 15% withholding tax. Since a TFSA is not taxed, there is no way to claim foreign tax paid and therefore no way to recover the withholding tax.

This should be the first account where Canadians contribute money because of it’s tax advantages.

Registered Retirement Savings Plan (RRSP)

A registered retirement savings plan, or RRSP, is a tax-deferred retirement savings account. Canadians are usually introduced to RRSPs through employer benefits via a group RRSP. Money is contributed pre-tax. Contributions to an employer group RRSP are deducted from payroll. Canadians may also open a self-directed RRSP. Contributions to a self-directed RRSP are post-tax, but a tax deduction is claimed at tax time.

You gain RRSP contribution room by earning income and reporting it on your T1 (Schedule 7) tax form. In your first year of working, you will not have any RRSP contribution room. You can start contributing in March of the following year. The contribution room is calculated as 18% of your previous year’s earned income, up to a limit. In 2023, the max contribution limit is $30,780 [3]. Your RRSP contribution room will be reported on your Notice of Assessment (NOA) from the CRA after you file your taxes. It is important to file your taxes if you worked, even if you don’t owe additional taxes. That is the only way to gain contribution room.

Your brokerage or group RRSP plan administrator will provide a tax slip for RRSP contributions. There are usually 2 tax slips, one for March through December of the previous year (current tax year) and one for January through February of the current year. Both of these should be reported on your tax return. While the January through Feburary contribution can be claimed on either the current or following tax year, it makes it easier if you claim it for the current tax year.

As I mentioned earlier, an RRSP is a tax-deferred account. The money that goes in is pre-tax, but any withdrawl is taxed as normal income. Therefore, it makes more sense to contribute to an RRSP when you’re at a higher tax bracket. The caveat is that if your employer offers an RRSP match, then it makes sense to contribute enough to get the match. It’s free money after all. Group RRSPs usually only offer funds with high expense ratios. What I do, and what many others do, is contribute just enough to the group RRSP to get the maximum match and contribute the remainder in a self-directed RRSP at a brokerage that offers better investment choices with lower fees.

There is an over-contribution buffer of $2,000. Above an over-contribution of $2,000 to an RRSP, the penalty is 1% of the excess in a month, for every month where there is an over-contribution. The penalties can add up if you don’t notice in time. The resolution steps are quite complicated, so it’s best if I link to a better resource [4].

You may withdraw from your RRSP at any time. However, there is danger in doing so. First, there is a tax withholding that depends on your province. You also have to report the RRSP withdrawl as income on your tax return. You also permanently lose the contribution room, unlike a TFSA where you get back the contribution room the following year.

An RRSP is a good place to invest in dividend-paying US securities and ETFs. The US recognizes an RRSP as a retirement account and therefore there is no withholding tax on US dividends.

Margin Account

A margin account, also known as a taxable account, is a regular investment account. You can contribute and withdraw without any restriction. You may also invest in any security or ETF, including dividend-paying US securities and ETFs. Since it is a taxable account, there is a withholding tax of 15% on US dividends. However, you may claim the foreign tax credit on your Canadian tax return.

Any sales will generate a taxable event, either a capital gain or a capital loss. Dividends from US or Canadian securities or ETFs also generate taxable events. You will receive tax forms from your brokerage for each of these taxable events. For each of your stock or ETF purchases, it’s important that you keep good records of your cost basis (the total amoount that you paid including commissions). Canadian brokerages are notorious for getting this data wrong. I use a spreadsheet to track my cost basis, but I’ve heard good things about Adjusted Cost Base.

Tax Forms

Statement of Securities Transactions (T5008)

If you sell shares of securities, your broker will provide a Form T5008. It lists the cost basis of shares purchased and the proceeds from sold shares. These transactions should be reported on your T1 (Schedule 3). This is where it’s important that you correct the cost basis.

Statement of Investment Income (T5)

A T5 tax form is the most common tax form that you will receive. If you received bank interest over $50, your bank will issue a T5 tax form to you. If you received dividends, your brokerage will also issue a T5 tax form.

Trust Income Tax and Information Return (T3)

A T3 is the other common tax form that you will receive. If you received dividends from an ETF, your brokerage will issue a T3 tax form to you.