Your TFSA Is Full. Now What Gets Taxed?

This is the foundation, and once it clicks, most of the rest follows. A non-registered account can generate three types of income, and Canada taxes each one at a different effective rate. Same dollar of profit, very different tax outcome.

The practical consequence: a GIC paying 4% and a stock that grows 4% and gets sold are not equivalent investments after tax. The GIC interest is fully taxed. Only half the stock gain is. At a 40% marginal rate, that is the difference between keeping 60 cents and keeping 80 cents on the dollar.

Foreign dividends catch people out. A dividend from Apple or Microsoft does not get the favourable Canadian dividend treatment. It is fully taxable, exactly like interest — and it has already had 15% shaved off before it reaches you.

If you have been confused about this, it is not your fault. The 2024 federal budget proposed raising the capital gains inclusion rate, the CRA began administering the proposal before it was law, the proposal was deferred, and then it was dropped. Headlines ran in every direction for close to two years.

Here is where it actually landed. For individuals filing a personal return in 2026, the general capital gains inclusion rate is 50%. There was no across-the-board permanent increase. That is the current legal reality.

• The inclusion rate for individuals is 50% — unchanged from what it has been since 2000
• The lifetime capital gains exemption rose to $1.25 million for qualified small business corporation shares and qualified farm or fishing property, retroactive to June 25, 2024
• Your principal residence remains exempt from capital gains tax under the principal residence exemption
• Capital losses can be carried back three years or forward indefinitely, but only against capital gains

Your adjusted cost base, or ACB, is what the CRA considers you to have paid for an investment. Your capital gain is the sale price minus the ACB, minus selling costs. Get the ACB wrong and your tax bill is wrong.

The complication is that ACB is not simply your purchase price. It is a running weighted average across every purchase of that specific security, in that specific account, adjusted for several things people forget.

1. 1Buy 100 shares at $50 = $5,000. Add the $10 commission. ACB is $5,010, or $50.10 per share.
2. 2Later buy 100 more at $70 = $7,000, plus $10 commission. Total ACB is now $12,020 across 200 shares, or $60.10 per share.
3. 3Sell 100 shares at $80 = $8,000. Your ACB for those shares is $6,010 (100 × $60.10). Your capital gain is $1,990.
4. 4You do not get to choose which shares you sold. Canada uses the weighted average, unlike the US where you can pick specific lots.

The adjustments people miss

• Commissions on both the buy and the sell — buying commissions increase ACB, selling commissions reduce your proceeds
• Reinvested distributions in a DRIP — every reinvested dividend buys shares and increases your ACB
• Reinvested capital gains distributions from an ETF or mutual fund, which you are taxed on even though you never received cash. These increase ACB, and forgetting them means you pay tax twice on the same money
• Return of capital, which reduces your ACB — common with REITs and some income ETFs
• Currency conversion — a US-dollar purchase must be converted to Canadian dollars at the exchange rate on the trade date, and the sale at the rate on the sale date. Exchange rate movement alone can create a taxable gain in Canadian dollars even if the stock went nowhere

This is the rule that quietly costs Canadians the most money, because you break it without knowing it and there is no warning at the time.

Selling an investment at a loss creates a capital loss you can use to offset capital gains. But if you — or someone affiliated with you — buy back the same or an identical security within 30 days before or 30 days after the sale, and still hold it 30 days after, the loss is denied. That is a 61-day window in total: 30 days before, the day of the sale, and 30 days after.

• "Affiliated persons" includes your spouse or common-law partner, a corporation you control, and a trust you are affiliated with — not just you
• The denied loss is added to the adjusted cost base of the replacement shares, so it is deferred rather than lost, as long as those shares are in a taxable account
• Buying a genuinely different security is fine. Selling one Canadian equity ETF and buying a different provider's Canadian equity ETF with a different index is generally acceptable, though the more similar they are the more caution is warranted

The same trap applies to your spouse. If you sell at a loss and your spouse buys the identical security in their account within 30 days, the loss is denied. Households that coordinate their investing need to coordinate their tax-loss harvesting too.

This one surprises almost everyone, and it is the strongest argument for thinking about which account holds which investment.

When a US company pays a dividend to a Canadian, the US government takes a 15% withholding tax off the top before the money reaches you. The Canada–US tax treaty sets that rate. What varies enormously is whether you ever get it back.

The reason is a quirk of treaty drafting. The treaty exempts pension accounts from withholding, and the IRS recognizes the RRSP and RRIF as pensions. The TFSA did not exist when the treaty was written and the IRS does not treat it as a pension. So the TFSA — the account Canadians think of as completely tax-free — is the one place where US dividend tax is unrecoverable.

Asset location means putting each type of investment in the account where it is taxed least. It is free money in the sense that it changes nothing about your risk or your holdings — only which wrapper they sit in.

A useful ordering rule: fill your registered accounts first, and inside them put whatever is taxed most harshly if held outside. Interest-bearing investments and foreign dividend payers are the worst things to hold in a taxable account, so they belong inside registered ones. Canadian dividend payers are the least bad, so they are the natural candidate for the non-registered account.

Non-registered accounts generate tax slips. Registered accounts do not, which is why the first year with a taxable account feels like a paperwork ambush.

One more piece of housekeeping worth doing once: if you regularly buy US-listed investments, look into Norbert's Gambit. It is a technique for converting Canadian dollars to US dollars at close to the institutional rate by buying a dual-listed security in one currency and selling it in the other. On a $10,000 conversion it typically saves $100 to $150 versus your brokerage's built-in conversion rate.

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