Home  ->  Stocks, Bonds etc.  ->  Investing Tax Issues -> Shares in corporations

Tax Treatment of Income From Investments in Shares of Corporations

This information is regarding shares which are held outside of RRSPs or other registered accounts.

Adjusted Cost Base Shares of Corporations

Superficial Losses and Other Disallowed Losses

Transfer Capital Losses to a Spouse

Shares in Canadian Corporations

Shares in Foreign Corporations

 - Tax Return and Withholding Tax

 - Distributions of Capital Gains or Return of Capital From Foreign Corporations

 - Foreign Exchange Conversion of Dividend Income

 - Adjusted Cost Base of Foreign Shares

Exchange Rate - Trade Date vs Settlement Date

Tax Tips

TaxTips.ca Resources

Canada Revenue Agency (CRA) Resources

Adjusted Cost Base Shares of Corporations

When shares in corporations are purchased, the adjusted cost base is the amount paid for the shares, including any commission paid.  When the shares are sold, the adjusted cost base of the shares is deducted from the proceeds of sale (after deducting commission paid on the sale) to determine the capital gain or loss.  Only 50% of capital gains are included in taxable income.  Capital losses cannot usually be deducted from other income.  They can only be used to reduce or eliminate capital gains, except in the year of death.

If shares in one corporation are purchased on different dates, the cost basis of each share is determined on a weighted average basis.  The total cost from all purchases is divided by the total number of shares owned to determine the cost of each share.  If only a portion of the shares are sold, the adjusted cost base of the sold shares is determined by using the average cost base of each share times the number of shares sold.

Shares in Canadian Corporations

The dividend income received from Canadian corporations gets favourable tax treatment in the form of a dividend tax credit.  This results in much less personal income tax being paid on dividend income than on interest income, or on dividends from foreign corporations.  The amount included in income (for 2012 and later years) for dividends from large Canadian corporations is 1.38 times the actual amount of dividends received.  The extra amount is called the dividend gross-up.  These dividends are eligible for an enhanced dividend tax credit.

Some Canadian corporations, such as Thomson Reuters, pay their dividends in US$. When these dividends are received in a Canadian $ brokerage account, the brokerage converts the dividends to Canadian $. If the shares are held in a US$ account then the dividends will not be converted to Canadian $. Some Canadian corporations are traded on US stock exchanges. Whether they are traded on a Canadian or US stock exchange doesn't affect the gross-up, or the eligibility of the dividend for the dividend tax credit. The currency of the dividend received will depend upon the currency of the account in which the shares are held. However, the dividend must still be reported in Canadian $ on your tax return.

See the combined federal and provincial/territorial tax tables on our Tax Rates and Credits page, which show the marginal tax rates for capital gains, Canadian dividends, and other income.  Our Canadian Tax Calculator is available for each province and territory except Quebec, which has a separate calculator.  The tax calculators can be used to compare taxes for different types of investment income.

See also Share Spin-offs by Canadian Corporations.

Tax Tip:  Shares in dividend-paying Canadian corporations should be held outside of registered accounts where possible, to take advantage of the favourable tax treatment.

Shares in Foreign Corporations

Income Tax Act s. 90(1)

Tax Return and Withholding Tax

Canadian residents who invest in shares which are traded on U.S. stock exchanges are not required to file a U.S. income tax return because of these investments, unless there is some other reason (e.g., U.S. citizen) for filing a U.S. income tax return.  All income and capital gains from the foreign shares will be reported on your Canadian income tax return.

When the foreign shares are held in a non-registered account, there will be withholding tax deducted from the foreign dividends at the time they are paid.  You can at least partially recover the tax by claiming a foreign non-business tax credit when you file your tax return.  If the shares are in an RRSP or RRIF, there is often no withholding tax due to the US-Canada Tax Treaty which provides for no withholding tax on "retirement" accounts. However, there may be withholding tax on foreign shares that are not US corporations, such as those held in American Depositary Receipts (ADRs).

When the foreign shares are in a TFSA, withholding tax will be deducted, and cannot be recovered. This is because a TFSA is not considered a "retirement" account. See our information on this in the article on which investments should be held inside vs outside an RRSP.

US estate tax may be payable by Canadian residents on US assets owned at the time of death, including shares in US corporations.

The dividend income received from foreign corporations does not qualify for a dividend tax credit, so tax is paid on 100% of the dividend (before deduction of withholding tax), when you file your Canadian tax return.

Distributions of Capital Gains or Return of Capital From Foreign Corporations

Distributions made by foreign non-resident corporations to Canadian shareholders are normally considered foreign dividends, 100% taxable.  When distributions from US shares are categorized as capital gains or return of capital for US taxpayers, they will still be considered fully taxable to Canadian taxpayers.  See the 2012 Tax Court Case Schmidt v. The Queen regarding return of capital.  However, in this case the decision was based on the taxpayer not providing documentation for his position.  S. 90(1) of the Income Tax Act (ITA) provides that the amount of a dividend received from a non-resident corporation is to be included in income. In order for a distribution from a non-resident corporation to be considered a return of capital for Canadian tax purposes, and thus reduce ACB under s. 53(2)(b)(ii) of the ITA, the distribution would have to be considered a return of capital under corporate tax law and not US tax law. See Tax Interpretation 9711965 from 1997. This would also apply to foreign (non-resident) mutual funds or exchange traded funds.  There is an exception in some cases when the non-resident corporation is a "foreign affiliate" of the Canadian taxpayer.  One of the criteria for a foreign affiliate is that the Canadian taxpayer owns at least 1% of the equity of the non-resident corporation.

See also Foreign Spin-Offs - Tax Deferral for Distributions.

Foreign Exchange Conversion of Dividend Income

The dividend income must be converted to Canadian dollars to determine the amount to include in your income.  You can convert using the exchange rates on the dates your foreign dividend income is received, or you can use the average annual exchange rate, as published by the Bank of Canada, for all the dividends received in the year.  See our Links page for links to foreign exchange rates.  Whichever method you use should be used consistently.

Adjusted Cost Base of Foreign Shares

IT95R Foreign Exchange Gains and Losses (Archived) says "Transactions on income account are normally recorded in a taxpayer's accounts in the Canadian dollar equivalent determined according to the rate of the exchange prevailing at the time of the transaction."  However, it does not address capital transactions. CRA has now addressed the question of the exchange rate to be used for capital transactions.

The adjusted cost base of purchased foreign shares must be calculated in Canadian dollars.  If Canadian funds were transferred to pay for the purchase, use the exchange rate charged in the transfer, which will be done at the trade date exchange rate.  If foreign funds were used to purchase or sell shares, CRA now indicates that the exchange rate on the settlement date should be used to convert to Canadian dollars.

In October 2015 at a Roundtable on Taxation of Financial Strategies and Financial Instruments, as per document 2015-0588981C6 (pdf), the question of foreign exchange transactions was discussed, including whether the exchange rate to be used should be the one on the transaction date (trade date) or the settlement date.  CRA responded that the Bank of Canada exchange rate for the settlement date should be used.  However, if you transfer funds from a Canadian account to a US account to cover the purchase, the rate at which the funds were actually converted can be used as the exchange rate.  This rate is determined and applied on the trade date.

Exchange Rate - Trade Date vs Settlement Date

What Does The Income Tax Act Say About The Exchange Rate?

S. 261(2) of the Income Tax Act states, re Canadian currency requirement:

(2) In determining the Canadian tax results of a taxpayer for a particular taxation year,

(a) subject to this section, other than this subsection, Canadian currency is to be used; and

(b) subject to this section, other than this subsection, subsections 20(14.2) and 79(7) and paragraphs 80(2)(k) and 142.7(8)(b), if a particular amount that is relevant in computing those Canadian tax results is expressed in a currency other than Canadian currency, the particular amount is to be converted to an amount expressed in Canadian currency using the relevant spot rate for the day on which the particular amount arose.

The question is:  Did the "particular amount" arise on the trade date or on the settlement date?  Only a court case decision could provide the answer.  We have not been able to find a relevant court case.  Regardless of which date is used for the exchange rate, the settlement date is the date of disposition, when ownership of the asset changes hands.

See the 2 examples below using shares purchased in US$, converted to Cdn$:

Tax Tips:

Shares in dividend-paying Canadian corporations should be held outside of registered accounts where possible, to take advantage of the favourable tax treatment.

Shares in dividend-paying US corporations are better held inside an RRSP or RRIF.  Shares in non-dividend paying or low dividend paying foreign corporations are better held outside to take advantage of the low tax rate on capital gains.

TaxTips.ca Resources

Reporting foreign income and expenses

Table of historical US$ - Cdn$ average and year-end exchange rates

Trade date vs settlement date, last trading date for the year

Canada Revenue Agency (CRA) Resources

Income Tax Folio S5-F4-C1, Income Tax Reporting Currency

Revised: September 20, 2024