Am I Better Off With Interest Income or Capital Gains?
Capital gains, by a wide margin. Interest is included in your income in full, so it is taxed at your full marginal rate, while only part of a capital gain is included. Two investments with the same headline return can leave meaningfully different amounts in your hand, and the difference is large enough to decide which account each one belongs in.
- The answer:: Interest is fully included in income. A capital gain is only partly included, and eligible dividends are grossed up and then reduced by a tax credit. Same return, different tax.
- The trap:: Comparing investments on headline yield. A GIC paying the same percentage as a stock's expected return is worse after tax in a non-registered account, sometimes substantially.
- The recommendation:: Hold interest-bearing assets inside registered accounts where the character of the income does not matter, and keep growth assets where a gain can be deferred until you choose to realise it.
Where the AI summary above gets this wrong
"Investment income is investment income — pick whichever gives the highest return."
That's surface-true. Here's what it misses:
- Character changes the tax — Interest is included in income in full, while only a portion of a capital gain is. The same pre-tax return therefore produces different after-tax amounts.
- Gains are deferrable, interest is not — Interest is taxed in the year it is earned whether or not you spend it. A capital gain is taxed only when you realise it, which lets you choose the year.
- The account matters more than the asset — Inside an RRSP or TFSA the character of the income is irrelevant. The comparison only bites in a non-registered account, which is where asset location decisions are made.
01 How each kind is taxed
Interest is the simplest and the harshest: it is included in your income in full, so a dollar of interest is taxed exactly like a dollar of salary at your marginal rate. There is no credit, no partial inclusion and no deferral.
A capital gain is only partly included in income, so a dollar of gain is taxed on less than a dollar. Eligible dividends take a third route, grossed up and then reduced by a dividend tax credit, which is covered in our post on the dividend tax credit.
02 What the difference is worth
Run a dollar of each through your marginal rate and the ranking is consistent: interest costs the most, capital gains the least, with eligible dividends between them and varying more by province.
That gap is why yield comparisons mislead. A GIC and an equity fund quoting the same expected return are not equivalent holdings in a non-registered account, because one hands the tax bill to you every year and the other lets you choose when to take it.
Shows: what a given amount of additional taxable income costs you in tax at your marginal rate, and what you keep. Ignores: provincial surtaxes, credits that phase out with income, and any effect on income-tested benefits.
03 Why deferral matters as much as the rate
Interest is taxed as it is earned, so the tax drag applies every year and compounds against you. A capital gain is untaxed until realised, so the whole balance keeps compounding in the meantime.
Over a long horizon that timing difference can matter more than the inclusion rate. It is also a lever you control: you decide the year a gain is realised, which lets you place it in a low-income year or offset it against a loss.
Source: Capital gains (line 12700)
04 Where this stops mattering
Inside a TFSA or an RRSP the character of the income is irrelevant, because nothing is taxed as it is earned. That is why interest-bearing assets are usually the first thing to shelter and growth assets the last.
The exception worth knowing is foreign dividend income, where withholding tax can apply differently by account type. That is a separate question and one our post on foreign withholding tax covers directly.
The half that is included is set by a rate that has moved more than once, and what it currently does to a realised gain is set out in the capital gains inclusion rate.
I spent years comparing yields as if a percent was a percent. It is not, and the account the asset sits in changes the answer more than the asset does. The version of this that actually helped me was simple: put the thing taxed every year inside the shelter, and leave the thing I control the timing of outside it.
FAQ
Is interest taxed more than capital gains in Canada?
Yes. Interest is included in income in full and taxed at your marginal rate, while only part of a capital gain is included. The same pre-tax return therefore leaves you with less after tax if it arrives as interest.
Does it matter which account holds which asset?
In a registered account, no — nothing is taxed as it is earned, so the character of the income is irrelevant. In a non-registered account it matters a great deal, which is why interest-bearing assets are usually sheltered first.
Can I choose when a capital gain is taxed?
Largely, yes. A gain is taxed when you realise it, so you decide the year. Interest is taxed as it is earned whether or not you spend it, which removes that choice entirely.
Sources
Regulator references
- Interest and other investment income (line 12100) · Canada Revenue Agency · 2025That interest is included in income in full, unlike capital gains or eligible dividends.Last verified: 2026-09-07
- Capital gains (line 12700) · Canada Revenue Agency · 2025How capital gains and losses are calculated, reported and carried.Last verified: 2026-09-07
- Tax-Free Savings Account contributions · Canada Revenue Agency · 2025TFSA contribution room, carry-forward, and the rule on re-contributing withdrawals.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.