Fact or myth: Is interest in a savings account taxable?

Paying taxes is a regular part of life for Canadians. As a Canadian resident, you pay taxes on all your taxable income. The Canadian tax system has many moving parts, and you can visit the Canadian Revenue Agency (CRA) website to understand how you’re taxed—as well as what to do when tax season rolls around.

If you’re actively saving money, you’ve probably wondered whether interest in a savings account is taxable. The short answer is yes—but there’s more you need to know. Let’s break down how your savings account and taxes work, and how you can maximize your returns.

What’s considered “taxable income” in Canada?

All streams of income that the CRA considers general income are subject to tax according to your tax bracket. After you apply any deductions, credits, or exemptions, you are left with your taxable income. In most cases, your employer automatically deducts a percentage of your paycheque for taxes.

As a Canadian resident, general income includes money you make from other countries, though you may be eligible for foreign tax credits to avoid double taxation. Examples of general income include:

• Salaries and wages
• Commissions
• Bonuses
• Interest and dividends
• Royalties
• Self-employment income
• Employee profit-sharing plans

You can see a complete list of the types of income you should report for taxes from the CRA website. 

You must report your taxable income as part of your taxes when you file each year. The CRA evaluates your tax return and provides a Notice of Assessment (NOA) indicating whether you owe money or are getting a refund.

How is a savings account taxed?

The interest earned in a savings account is added to your total taxable income. Your overall income determines your tax bracket, which then sets the percentage of tax you pay.

Let’s say you’ve earned $1,000 in interest, on top of making $50,000 from your job and other income sources. You would then report $51,000 as your taxable income for the year.

Because interest rates affect how much your money grows (and how much tax you might owe), it helps to know how financial institutions set these percentages. To learn more, check out our guide to high-interest savings account interest rates.

How do I report interest on my taxes?

If you earn interest in a savings account, your financial institution will provide a T5 slip, otherwise known as a Statement of Investment Income. This form shows the interest, dividends, and other investment income you earned during the tax year.

You can download your T5 directly from your financial institution or access it through your CRA My Account page. Financial institutions are only required to issue a T5 if you earn $50 or more in interest during the year.

If you are a Quebec resident, you will receive an RL-3 slip instead if you earn $50 or more in interest, alongside a T5 for your federal return.

How do I avoid tax on my savings account in Canada?

Because the CRA views interest as regular income, you generally pay tax on what you earn. Even if you move your interest earnings to a tax-sheltered account later, you still owe tax on the money earned while it sat in a regular account. When it comes to avoiding tax on a savings account in Canada, the best route is to use a tax-free savings account (TFSA).

A TFSA is a tax-sheltered account—thismeans any interest, dividends, or capital gains you earn inside it are entirely tax-free, and you won’t pay taxes when you withdraw your funds. Most financial services providers offer TFSAs, and you can use them to hold savings, stocks, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), or bonds. Just keep an eye on your annual contribution limits to avoid penalties.

The bottom line: savings accounts and taxes

Interest earned in a savings account is taxable. This applies to both traditional savings accounts and high-interest savings accounts (HISAs). For a side-by-side look at the top accounts on the market, read our comparison of the best HISAs in Canada.

Even with taxes factored in, a high-interest savings account is an excellent tool for short-term goals or building an emergency fund. The Neo Savings account offers a competitive interest rate, offering up to 2.75%¹ interest on every dollar deposited into the account.

You can open multiple accounts, personalize them for different goals, and track your progress with built-in tools. There are no monthly fees, no minimum balances, and you can transfer your money whenever you want.

Ready to grow your money faster? Open a Neo Savings account today—it only takes a few minutes to get started.