Fact or myth: Is interest in a savings account taxable?
Paying taxes is a known concept for most Canadians. As a Canadian resident, you’ll pay taxes on all your taxable income. The Canadian tax system has many components, and you can visit the Canadian Revenue Agency (CRA) website to understand how you’re taxed and what to do when tax season rolls around.
You’ve probably wondered whether interest in a savings account is taxable. The short answer is yes, it does. Keep reading as we break down how your savings account is taxed and what you can do.
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 will be left with your taxable income. In most cases, your employer would automatically deduct a percentage of your paycheque for taxes and other payments.
General income includes income you make from other countries as a Canadian resident, but there may be relief from double taxation and foreign tax credits available to claim.
Examples of general income include:
- Salaries
- Wages
- Commissions
- Bonuses
- Interest
- Dividends
- Royalties
- Self-employment income
- Employee profit-sharing plan
You can see a complete list of the types of income you should report for taxes from the CRA website here. 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. The notice of assessment indicates how much you owe the CRA or how much you get back as a refund.
How is a savings account taxed?
The amount of interest earned in your savings account is added to your total taxable income on your tax return. Different tax brackets determine the percentage of tax deducted based on the total income amount. You pay taxes to the CRA according to your tax bracket.
Let’s say you’ve earned $1,000 in interest in your savings account and a total of $50,000 from all other sources of taxable income. You would report $51,000 as your taxable income for the year.
How do I report interest on my taxes?
If you’ve earned interest in your savings account, the financial provider will give you a T5 form to report the interest earnings on your tax return. The T5 form is the statement of investment income form where you report the interest, dividends, and other sources of applicable investment income you earned during the tax year. You can also log into your savings or CRA account to access your T5 form. You’ll only get a T5 form if you earn at least $50 of interest during the year.
You’ll get an RL-3 form if you’re a Quebec resident and earned at least $50 from interest in a savings account during the tax year. The RL-3 form is your investment income form to submit with your tax return. You’ll also receive the T5 form, which you’ll use to complete your federal tax return.
Even if you earn less than $50 in interest in your savings account, it’s your responsibility to report any interest income on your tax return. Note the T5 or RL-3 form doesn't include the deposits you make into your savings account–only the interest income you earn from your deposits.
How do I avoid tax on my savings account in Canada?
The CRA considers interest earned in a savings account part of your taxable income, so you’ll have to pay taxes on any amounts earned above $50. Even if you transfer money from your savings account to a tax-sheltered account, you’ll still have to pay taxes if you earned the interest in a non-tax-sheltered account.
You can open a tax-free savings account (TFSA) if you want to avoid paying taxes for any income earned in your account. The TFSA is a tax-sheltered account, so you won’t pay taxes on interest income when you receive it or withdraw the funds.
If you want to open a TFSA, check with your financial provider to see if they provide the account. You can use it to save on interest and invest in products like stocks, exchange-traded funds, guaranteed investment certificates, and bonds. There are specific rules and limitations for a TFSA, so make sure you understand what you can or can’t do with the account.
The bottom line
The bottom line is interest in a savings account is taxable–including interest from a traditional and high-interest savings account. The tax rate depends on your taxable income, which is the total amount of income you make from the categories listed above after any deductions, credits, or exemptions.
You’ll receive a T5 (and RL-3 form for Quebec residents), which indicates the amount of interest you earned from your savings account and other applicable sources of investment income. You’ll submit the total amount indicated on the form when you file taxes.
If you don’t want to pay taxes on your savings account, consider opting for a tax-sheltered account like the TFSA. You can seek professional advice if you want help regarding your specific financial situation.
Although interest in a savings account is taxable, there are many benefits to consider. For example, a high-interest savings account offers a higher interest rate than traditional savings accounts. You can use it to plan for short-term goals or save money for an emergency fund.
The Neo High-Interest Savings account offers one of the highest interest rates in Canada¹ with 4% interest² on every dollar deposited into the account.
You can personalize multiple accounts with different goals to keep your finances organized and on track. The built-in smart tools make it easy for you to set goals and monitor progress to ensure you can meet them. There are no monthly fees or minimum balances required.
Whether you’re starting to save or an expert, the Neo High-Interest Savings account can support you wherever you are along your journey. Plus, you have the flexibility to transfer money whenever you want between accounts.
Learn more about the Neo High-Interest Savings account and open your account today. It only takes a few minutes to start your savings journey with us.
¹ Based on research of high-interest savings accounts, comparing and limited to: BMO, CIBC, Scotiabank, TD Bank, RBC, Simplii Financial, Desjardins, and Tangerine. Research conducted by Neo Financial and based on data taken from public websites on December 21, 2023. Research excludes welcome offers and promotional rates.
² Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
