Interest Income Tax Guide

Sources of Interest Income

Bank Accounts

• Savings accounts
• High-interest savings accounts (HISAs)
• Money market accounts
• Chequing accounts (if interest paid)

Fixed Income Investments

• GICs (Guaranteed Investment Certificates)
• Term deposits
• Government bonds (federal, provincial, municipal)
• Corporate bonds
• Treasury bills

Other Sources

• Private loans you've made
• Mortgage investments
• Tax refund interest (yes, CRA pays interest)
• Trust distributions (interest portion)

How Interest Is Taxed

Full Inclusion

• 100% of interest is taxable
• Added to your other income
• Taxed at your marginal rate
• No special credits or deductions

Example

If you earn $1,000 in interest and your marginal rate is 40%:

• Taxable: $1,000
• Tax: $400
• After-tax: $600

Comparison to Other Investment Income

*Approximate, assuming 40% marginal rate

Reporting Interest Income

T5 Slip

You'll receive a T5 if you earn $50 or more:

• Box 13: Interest from Canadian sources
• Report on Line 12100 of your return

No T5 Required

You must still report interest even without a T5:

• If under $50 from a source
• Interest from private loans
• Foreign interest (report on Line 12100)

Accrued Interest

For multi-year GICs and bonds:

• Must report interest at least annually
• Even if not received
• Financial institutions issue T5 for accrued amounts

GIC Tax Considerations

Annual vs Compound GICs

• Annual pay: Interest taxed when received
• Compound: Interest taxed when accrued (annually)
• Tax owed even if interest reinvested

Multi-Year GICs

• Interest accrues and is taxable each year
• May receive T5 with accrued interest
• Track ACB if selling before maturity

Bond Tax Treatment

Regular Interest

• Coupon payments are 100% taxable
• Reported on T5 or T3 (if through fund)

Capital Gains/Losses

• Selling bond for more/less than purchase price
• Capital gain/loss treatment (50% inclusion)
• Separate from interest component

Stripped Bonds/Zero-Coupon Bonds

• No cash interest paid
• Still must report imputed interest annually
• Taxed on "phantom" income
• Best held in registered accounts

Tax-Efficient Interest Strategies

Use Registered Accounts

• RRSP: Interest grows tax-deferred
• TFSA: Interest grows tax-free forever
• RESP: Tax-free growth for education
• Prioritize interest-bearing investments here

Asset Location Strategy

Optimize across account types:

• Interest/bonds → RRSP/TFSA
• Canadian dividends → Non-registered
• US dividends → RRSP (no withholding)
• Growth stocks → TFSA or non-registered

Consider Tax-Efficient Alternatives

• Dividend-paying stocks instead of bonds
• Return of capital investments
• Capital gains-focused investments

Foreign Interest Income

Reporting Requirements

• Report in Canadian dollars
• Use exchange rate when received
• Include on Line 12100

Foreign Tax Credit

• May have foreign withholding tax
• Claim foreign tax credit
• Reduces Canadian tax

T1135 Reporting

• If foreign property costs over $100,000
• Must file T1135 annually
• Includes foreign bank accounts, bonds

Interest Expense Deductions

Interest you pay may be deductible:

• Money borrowed to earn investment income
• Must have reasonable expectation of income
• Track and report on Line 22100
• Not deductible if borrowed for TFSA/RRSP

Real Return Bonds

Inflation-indexed bonds have special tax treatment:

• Interest portion taxed normally
• Inflation adjustment also taxable as interest
• Creates "phantom" taxable income
• Best in registered accounts

Prescribed Rate Loans

Interest paid on income-splitting loans:

• Must charge at least prescribed rate
• Interest received is taxable to lender
• Interest paid deductible to borrower
• Strategy for income splitting