Key Takeaways
- 1.Ontario's top combined marginal rate on interest income is 53.53%, on eligible dividends is 39.34%, and on capital gains is 26.77%. The spread exceeds 26 percentage points.
- 2.On a $200,000 portfolio earning 5% annually, interest income grows to $316,600 after 20 years. Capital gains grow to $410,600 — a gap of approximately $94,000.
- 3.The dominant asset location strategy: hold bonds and GICs inside RRSP/TFSA, hold Canadian equities in non-registered accounts where dividends and capital gains receive preferential tax treatment.
- 4.The 2024 capital gains inclusion rate change (50% to 66.67% above $250,000) adds a new wrinkle — large one-time dispositions now face a 35.69% effective rate on gains exceeding the threshold.
- 5.Tax drag is not just an annual cost — it compounds. Each year, tax reduces the base that earns future returns, creating an accelerating wealth gap between tax-efficient and tax-inefficient income types.
Three Types of Investment Income, Three Very Different Tax Rates
The Canadian tax system does not treat all investment income equally. In a non-registered account, every dollar earned is taxable — but the rate depends entirely on the type of income. At Ontario's top combined federal-provincial bracket, the differences are dramatic.
| Income Type | Inclusion Rate | Effective Tax Rate | After-Tax on $1,000 |
|---|---|---|---|
| Interest / Foreign Income | 100% | 53.53% | $464.70 |
| Ineligible Dividends | 115% gross-up | 47.74% | $522.60 |
| Eligible Dividends | 138% gross-up | 39.34% | $606.60 |
| Capital Gains (≤$250K) | 50% | 26.77% | $732.30 |
| Capital Gains (>$250K) | 66.67% | 35.69% | $643.10 |
| Return of Capital | 0% (deferred) | 0% (current year) | $1,000.00 |
Combined federal and Ontario rates at the top marginal bracket (income above ~$220,000). Eligible dividend rates reflect the 138% gross-up and combined federal/Ontario dividend tax credit. Return of capital reduces your adjusted cost base, deferring tax until disposition.
The spread between interest and capital gains is 26.76 percentage points. On $10,000 of investment income, that is a $2,676 difference in tax — every single year. And unlike a one-time cost, this gap compounds. For a detailed breakdown of how Ontario's income tax brackets work, see our Ontario income tax calculator for 2025.
Annual Tax Drag Math: $200,000 Portfolio at 5% Return
Tax drag is the percentage of your pre-tax return consumed by taxes each year. For each income type, we calculate the after-tax return and show what happens to a $200,000 portfolio over one year.
Pre-tax income on $200,000 at 5%: $10,000
Interest income:
Tax: $10,000 × 53.53% = $5,353
After-tax income: $4,647
After-tax return: 2.32%
Tax drag: 53.53% of your return lost to tax
Eligible dividends:
Tax: $10,000 × 39.34% = $3,934
After-tax income: $6,066
After-tax return: 3.03%
Tax drag: 39.34% of your return lost to tax
Capital gains (realized annually):
Tax: $10,000 × 26.77% = $2,677
After-tax income: $7,323
After-tax return: 3.66%
Tax drag: 26.77% of your return lost to tax
Why 1.34 percentage points matters enormously: The difference between a 2.32% after-tax return (interest) and a 3.66% after-tax return (capital gains) looks small in year one — $2,676 on a $200,000 portfolio. But compounding turns small annual differences into massive terminal wealth gaps. Over 20 years, that 1.34 percentage-point difference grows into approximately $94,000.
20-Year Compound Wealth Gap: Interest vs. Dividends vs. Capital Gains
This is the table that no existing non-registered account calculator for Ontario provides. Starting with $200,000 and earning 5% gross annually, here is what each income type produces after tax over 20 years.
| Year | Interest (53.53%) | Eligible Div (39.34%) | Cap Gains (26.77%) | Gap: Interest vs. CG |
|---|---|---|---|---|
| 0 | $200,000 | $200,000 | $200,000 | $0 |
| 5 | $224,338 | $232,228 | $239,398 | $15,060 |
| 10 | $251,638 | $269,649 | $286,558 | $34,920 |
| 15 | $282,286 | $313,116 | $343,019 | $60,733 |
| 20 | $316,610 | $363,552 | $410,578 | $93,968 |
Assumes $200,000 initial investment, 5% annual return, all income reinvested after tax, Ontario top combined marginal rates, and capital gains realized annually. If capital gains are deferred (buy-and-hold until year 20), the after-tax value increases to approximately $442,100 — widening the gap to over $125,000 versus interest.
The $93,968 gap is not a theoretical number — it is real money that disappeared to tax because of what the portfolio held, not how it performed. A 5% GIC and a 5% equity index fund produce the same gross return. The tax system turns them into fundamentally different investments. For a deeper comparison of how registered and non-registered accounts handle this differently, see our RRSP vs. non-registered account tax drag calculator.
Deferred Capital Gains: The Buy-and-Hold Advantage
The table above assumes capital gains are realized (and taxed) every year. In practice, a buy-and-hold equity investor defers capital gains until they sell. This deferral is a second layer of tax efficiency on top of the lower rate.
Buy-and-hold capital gains over 20 years ($200,000 at 5%):
Pre-tax value at year 20: $200,000 × (1.05)²&sup0; = $530,660
Total capital gain: $530,660 − $200,000 = $330,660
Tax on $330,660 at 26.77%: $88,534
After-tax value: $530,660 − $88,534 = $442,126
Compare to interest income (annually taxed):
After-tax value at year 20: $316,610
Wealth gap (deferred CG vs. interest): $125,516
The deferral benefit alone (vs. annually realized CG) adds $31,548— the full 5% return compounds untouched by tax for 20 years, and tax is paid only once at the end.
Caveat on the $250,000 threshold: If your deferred capital gain exceeds $250,000 in a single tax year (as it would in this example with a $330,660 gain), the portion above $250,000 is included at 66.67% instead of 50%. The first $250,000 of gain is taxed at 26.77% ($66,925 in tax), and the remaining $80,660 is taxed at 35.69% ($28,779). Total tax: $95,704. After-tax value: $434,956 — still $118,346 more than the interest scenario.
Asset Location: The Dominant Strategy
Asset location — deciding which investments go in which accounts — is the single highest-impact tax decision for an Ontario investor with both registered and non-registered accounts. The principle is simple: shelter the most heavily taxed income inside registered accounts, and hold tax-efficient investments outside.
| Asset Type | Best Account | Why |
|---|---|---|
| Bonds / GICs | RRSP | Interest taxed at 53.53% outside; sheltered inside RRSP |
| Foreign equities (US, international) | RRSP | Foreign withholding tax (15% US) recovered via Canada-US treaty in RRSP only; not recoverable in TFSA |
| Canadian equities (dividends + growth) | Non-registered | Eligible dividends at 39.34% and capital gains at 26.77% are already preferentially taxed |
| Highest expected growth (small-cap, emerging) | TFSA | All growth is permanently tax-free; maximize the shelter on the highest-growth assets |
| REITs / income trusts | RRSP or TFSA | Distributions often include interest-equivalent income taxed at full rate outside registered accounts |
This is the standard asset location framework recommended by most Canadian tax professionals. Individual circumstances (expected marginal rate in retirement, account sizes, investment horizon) may warrant adjustments. For a deeper look at optimal account allocation, see our RRSP vs. TFSA vs. non-registered optimal allocation calculator.
Registered vs. Non-Registered: Side-by-Side Comparison
Before investing in a non-registered account, ensure your RRSP and TFSA room is fully utilized. Here is why the registered accounts are so much more powerful, using the same $200,000 and 5% return over 20 years.
| Account Type | Growth (20 yrs) | Tax on Withdrawal | After-Tax Value |
|---|---|---|---|
| TFSA | $530,660 | $0 | $530,660 |
| RRSP (30% retirement rate) | $530,660 | $159,198 | $371,462 |
| Non-reg (capital gains) | $410,578 | Included annually | $410,578 |
| Non-reg (eligible dividends) | $363,552 | Included annually | $363,552 |
| Non-reg (interest) | $316,610 | Included annually | $316,610 |
RRSP assumes a 30% combined marginal rate in retirement (typical for $50,000–$60,000 of retirement income in Ontario). The RRSP still beats non-registered interest income by $54,852 despite the eventual tax on withdrawal. The TFSA beats non-registered interest by $214,050. For a full RRSP vs. TFSA analysis, see our RRSP vs. TFSA Ontario tax comparison.
The 2024 Capital Gains Inclusion Rate Change
Effective June 25, 2024, the capital gains inclusion rate increased from 50% to 66.67% for individual net capital gains exceeding $250,000 in a single tax year. This creates a two-tier system that Ontario non-registered account holders need to understand.
Example: $350,000 capital gain realized in 2025 (Ontario top bracket)
First $250,000: 50% inclusion × 53.53% rate = 26.77% effective
Tax on first $250,000: $66,925
Next $100,000: 66.67% inclusion × 53.53% rate = 35.69% effective
Tax on next $100,000: $35,690
Total tax on $350,000 gain: $102,615
Blended effective rate: 29.32%
Under the old rules (flat 50% inclusion):
Tax on $350,000: $350,000 × 26.77% = $93,695
Additional tax from the change: $8,920
For most investors with a $200,000 portfolio, annual realized capital gains will stay well under $250,000, so the 50% inclusion rate and 26.77% effective rate continue to apply. The two-thirds rate primarily affects large one-time events: selling a rental property, liquidating a concentrated stock position, or receiving a large capital gains distribution from a mutual fund. For worked examples of the inclusion rate change, see our capital gains inclusion rate calculator for Ontario.
Tax Drag by Income Bracket: It Gets Worse as Income Rises
The examples above use Ontario's top combined rates. Here is how the 20-year wealth gap between interest and capital gains changes across income levels.
| Taxable Income | Interest Rate | Cap Gains Rate | 20-Yr Interest Value | 20-Yr CG Value | Wealth Gap |
|---|---|---|---|---|---|
| $55,000 | 29.65% | 14.83% | $342,162 | $395,174 | $53,012 |
| $105,000 | 33.89% | 16.95% | $333,392 | $389,676 | $56,284 |
| $148,000 | 43.41% | 21.70% | $315,346 | $377,068 | $61,722 |
| $220,000+ | 53.53% | 26.77% | $316,610 | $410,578 | $93,968 |
All scenarios assume $200,000 initial investment, 5% annual return, income reinvested after tax. Rates include federal tax, Ontario provincial tax, and Ontario surtax where applicable. The wealth gap grows with income because the spread between interest and capital gains rates widens at higher brackets.
Practical Application: The $148K Ontario Investor
Let's bring this back to the specific scenario. You earn $148,000 in employment income and have $200,000 in a non-registered account. Your RRSP and TFSA are maxed. Here is the optimal approach.
Step 1: Audit your non-registered holdings
Identify what proportion of income is interest vs. dividends vs. capital gains.
A portfolio of 100% GICs at $148K income has an after-tax return of 2.83%
(5% × (1 − 0.4341)). That is a 43.41% tax drag.
Step 2: Relocate interest-producing assets
If your RRSP holds Canadian equities, swap them with the GICs/bonds in your
non-registered account. The equities produce dividends and capital gains (lower tax)
while the GICs produce interest (high tax) — sheltering interest inside the RRSP
eliminates the tax drag entirely.
Step 3: Favor Canadian equities in non-registered
Canadian eligible dividends receive the dividend tax credit. At $148K income,
the effective rate on eligible dividends is significantly lower than interest.
Capital gains from growth stocks have the added benefit of deferral until sale.
Step 4: Track your adjusted cost base (ACB)
In a non-registered account, you are responsible for tracking ACB for capital gains
calculations. Reinvested distributions, return of capital, and corporate
reorganizations all affect your ACB. CRA will not calculate this for you.
For a comparison of how eligible dividends and capital gains perform in different provinces, see our eligible dividends vs. capital gains tax efficiency calculator.
Important Disclaimer
This article provides general information about investment income taxation in Ontario non-registered accounts. It is not financial, tax, or investment advice. Combined federal-Ontario marginal tax rates are based on 2025 brackets and include the Ontario surtax. The 2025 TFSA contribution limit is $7,000 and the RRSP deduction limit is $32,490, as published by the CRA. The capital gains inclusion rate change to 66.67% for gains exceeding $250,000 applies to dispositions after June 24, 2024. Eligible dividend tax rates reflect the 138% gross-up factor and combined federal/Ontario dividend tax credits. Actual tax outcomes depend on individual circumstances including total income from all sources, applicable deductions and credits, and the specific composition of investment income. Return of capital reduces adjusted cost base and creates a deferred tax liability. Consult a qualified tax professional for advice specific to your situation.