How Do Investments Make You Money? 3 Types of Canadian Investment Income

If you’ve ever looked at your investment account and thought, “Okay… but how do I actually earn money from this?” you’re not alone.

In Canada, investments can grow your wealth in a few different ways, and the way you earn returns matters — especially when it comes to taxes.

This is particularly important if you’re investing inside a non-registered account (also called a taxable account), where investment income is not sheltered the way it is in a TFSA or RRSP.

Let’s break down the three main ways investments make you money, and how each one is taxed in Canada.

The 3 ways investments make you money in Canada

Most investments generate returns through one (or a mix) of these:

• interest income

• dividends or distributions

• capital gains

Understanding the difference can help you:

• choose the right investments for the right account

• avoid tax surprises

• build a more tax-efficient investing strategy over time

1) Interest Income

Interest income is what you earn when you lend money to a bank, government, or borrower.

You’ll commonly earn interest from:

• high-interest savings accounts (HISA)

• GICs (Guaranteed Investment Certificates)

• bonds

• bond ETFs or bond mutual funds

How interest is taxed in Canada (non-registered account)
Interest income is taxed at your full marginal tax rate, just like employment income.

That’s why interest is typically considered the least tax-efficient type of investment income in a non-registered account.

If you’re building long-term wealth, it’s worth knowing that you may owe tax each year on interest earned, even if you leave the money invested.

2) Dividends and ETF distributions

Dividends are payments made to shareholders from a company’s profits. If you own dividend-paying stocks or dividend-focused ETFs, you may receive dividends regularly.

Distributions are a broader category and often show up when you own ETFs or mutual funds. A distribution can include:

• dividends

• interest

• capital gains

• sometimes other components (depending on the fund)

Eligible Canadian dividends generally receive preferential tax treatment compared to interest income.

However, ETF distributions can be more complex because not all distributions are taxed the same way. Two ETFs can both “pay income,” but the tax result can look very different depending on what’s inside the distribution.

This is one of the reasons why it’s important to understand what you’re actually holding — not just what the payout looks like.

3) Capital gains (how most investors build wealth)

Capital gains are often the biggest driver of long-term portfolio growth.

You earn a capital gain when you sell an investment for more than you paid for it.

Example:
You buy an ETF for $5,000 and later it’s worth $7,000.
If you sell, you have a $2,000 capital gain.

In Canada, only 50% of a capital gain is taxable.

Using the example above:

• capital gain = $2,000

• taxable portion = $1,000 (50% of the gain)

• that $1,000 is added to your income and taxed at your marginal tax rate

This is what makes capital gains more tax-efficient than interest income.

One key benefit of capital gains: you typically don’t pay tax until you sell.
If you don’t sell the investment, you may not trigger a capital gains tax bill that year.

Why taxes usually don’t matter inside your TFSA, RRSP, or FHSA

The tax rules above mainly apply to non-registered investing.

If your investments are inside registered accounts such as:

• TFSA

• RRSP

• FHSA

then investment growth is sheltered in different ways:

TFSA

• growth and withdrawals are generally tax-free

RRSP

• contributions are tax-deductible

• investments grow tax-deferred until withdrawal

FHSA

• contributions are tax-deductible

• withdrawals can be tax-free when used correctly for a first home purchase

This is why Canadians are usually best served by maxing out registered accounts first before investing in a taxable account.

When would you invest in a non-registered account?

A non-registered account becomes relevant when:

1. you’ve maxed out your TFSA/RRSP/FHSA contribution room and still have money to invest, or

2. you receive a lump sum and need a plan

Common examples include:

• an inheritance

• selling a home or rental property

• a settlement

• a large bonus

• business income or a business sale

• large savings sitting in cash

When you’re dealing with a lump sum, it’s not just about investing it… it’s about investing it tax-efficiently, and in a way that aligns with your long-term goals.

The truth about non-registered accounts: there’s no hiding from taxes

This is the part most people don’t realize until they get surprised by a tax bill.

In a non-registered account:

• if you earn interest, dividends, or distributions in the year, you may owe tax in that same year

• if you sell investments (even to rebalance your portfolio), you may trigger a capital gain or capital loss

Non-registered investing is still a great option — it just needs more strategy and planning.

Final thoughts (and when to get help)

Understanding how investment income works in Canada is one of the easiest ways to become a more confident investor.

If you’re:

• investing outside your TFSA/RRSP/FHSA

• expecting an inheritance

• sitting on a lump sum

• unsure how to minimize taxes while still investing for growth

this is where professional planning can make a big difference.

If you’ve maxed out your TFSA and RRSP and you’re now investing in a non-registered account, your investment returns don’t just affect your portfolio — they can affect your tax bill.

This is where having an advisor matters.

Through my work with Justwealth, I help clients create an investment plan across all account types (TFSA, RRSP, FHSA, and non-registered), with a portfolio that’s built for long-term growth and managed professionally.

If you’d like support setting this up properly, reach out here and I’ll walk you through your options.

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