You’ve worked hard to get where you are, and now that you’re earning an income, you might finally have a bit left over to invest. Maybe it’s sitting in a savings account, maybe you bought a few shares through your bank, or maybe you’re just starting to wonder where to begin.
Most medical residents assume that all income—whether it’s from your job, side work, or investments—is taxed the same way.
It’s not.
In Canada, investment income comes in a few different forms: interest, dividends, rental income, and capital gains. Each one is taxed differently. Understanding how they work isn’t about becoming a tax expert—it’s about giving you the confidence to make smart financial decisions early in your career.
1. What Creates Different Types of Investment Income
Interest Income – You’re the Lender
When you keep money in a savings account, GIC, or government bond, you’re essentially lending your money to someone else. They pay you interest for the use of your funds.
For example, if you deposit $10,000 in a savings account earning 4%, at the end of the year you’ve earned $400 in interest income. Interest is guaranteed, but every dollar is fully taxable—just like your employment income.
There’s one twist that surprises many new investors: if you borrow money to make an investment (for example, by taking out a line of credit to buy dividend-paying stocks or income-producing real estate), the interest expense on that borrowing is usually deductible. That means you can claim the interest cost as an expense to reduce the amount of investment income reported on your tax return.
It’s important that the borrowed funds are used to earn income—otherwise, the interest deduction won’t apply. This is a useful concept for physicians later in practice who use leverage to invest, but it’s good to understand the principle now.
Dividend Income – You’re a Part-Owner
When you buy shares, you become an owner of the company. As an owner, you’re entitled to a portion of its profits. When the board decides to share some of those profits with shareholders, it pays a dividend. Dividends are typically paid quarterly and are not guaranteed—they depend on profits and cash flow.
Think of two real-life examples:
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TD (The Toronto-Dominion Bank): If you own TD shares and TD earns profits, it may distribute part of those profits to you as a dividend.
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Apple: If you own Apple shares, Apple may also pay you a dividend from its profits.
Now, the tax treatment differs depending on where the company is based.
1) Canadian Dividends (e.g., TD)
Dividends from Canadian corporations get special tax treatment. Why? Because part of the company’s profit has already been taxed at the corporate level before it gets to you. To avoid taxing the same dollars twice, Canada uses a system called “integration.”
Here’s what that means in plain language:
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The cash dividend you receive is first “grossed up” on your tax return to approximate the company’s pre-tax profit that funded the dividend.
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You then get a dividend tax credit, which reduces your personal tax to reflect the tax already paid upstream by the corporation.
The result is that eligible dividends (the kind usually paid by large public Canadian companies like TD) are taxed at a lower personal rate than interest income. There are also non-eligible dividends (commonly from smaller private Canadian corporations), which get a smaller credit and are usually taxed a bit higher than eligible dividends but still often lower than interest.
A quick Ontario example:
You receive $100 in eligible Canadian dividends. After the gross-up and dividend tax credit math plays out on your return, most Ontario residents earning around $100,000 will see roughly $25 of tax on that $100, leaving about $75 after tax. The numbers shift a little with income level, but the concept holds—dividends are generally more tax-efficient than interest.
2) Foreign Dividends (e.g., Apple)
Dividends from non-Canadian companies, such as Apple, don’t qualify for the Canadian dividend tax credit. In Canada, they’re generally taxed like ordinary investment income at your marginal rate.
In addition:
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The foreign country may withhold tax at source (for U.S. stocks, often 15% under the tax treaty).
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You may be able to claim a foreign tax credit on your Canadian return to avoid being taxed twice.
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Account type matters: U.S. dividends paid into an RRSP may avoid U.S. withholding tax, but those paid into a TFSA generally do not.
In short:
Dividends represent your share of a company’s profits. Canadian dividends receive a credit because corporate tax has already been paid. Foreign dividends do not; they’re taxed like regular income, with possible foreign tax relief. And dividends, while potentially tax-efficient, are not guaranteed—they depend on the company’s performance.
Capital Gains – You Sold for More Than You Paid
When you buy an investment and later sell it for more than you paid, the difference is called a capital gain.
For example, you buy shares for $1,000 and sell them later for $1,500—you’ve earned a $500 capital gain. Only half of that gain is taxable, which makes capital gains the most tax-efficient type of investment income.
Rental Income – You’re the Landlord
If you own property and rent it out, the money you collect is rental income. But unlike employment income, you’re allowed to deduct a wide range of expenses from your gross rent to calculate your net rental income—the amount that actually gets taxed.
Common deductible expenses include:
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Mortgage interest
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Property taxes
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Utilities (if you pay them)
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Repairs and maintenance
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Insurance
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Advertising for tenants
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Travel costs related to managing the property
These expenses reduce the rental income you report on your return, which in turn reduces your personal income tax. It’s important to keep detailed records and receipts for each expense to support any deduction you claim.
1.5 Active Income vs. Passive Income — Understanding the Difference
Before we look at how investment income is taxed, it helps to understand why it’s treated differently from the income you earn as a medical resident.
Active income is money you earn by working—your employment income, moonlighting income, or self-employment (practice) income. It’s directly connected to your effort, skill, and time. You earn it by being actively involved.
Passive income, on the other hand, is money you earn from your capital or assets—for example, interest from a savings account, dividends from shares, rent from a property, or a capital gain from selling an investment. Once the investment is made, it can continue earning income even while you’re on call, sleeping, or on vacation.
Because passive income doesn’t involve labour, the tax rules treat it differently. It’s still taxable, but often at different rates or through different mechanisms. For example, only half of a capital gain is taxable, while interest is fully taxable. Understanding this distinction helps you see why “earning income while you sleep” comes with its own set of tax rules.
2. How Each Type of Income Is Taxed
To show the difference, let’s imagine you earn $100 in each type of income while living in Ontario.
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If you earn $100 in interest income, you’ll pay roughly $40 in tax and be left with about $60 after tax.
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If you earn $100 in dividend income from a Canadian corporation, you’ll pay about $25 in tax and be left with roughly $75 after tax.
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If you earn $100 in capital gains, only half of that gain is taxable, so you’ll pay about $20 in tax and be left with around $80 after tax.
These are approximate figures for someone earning around $100,000 in Ontario, but they illustrate the main point: the type of income matters.
Earning $100 in interest leaves you with about $60, while $100 in capital gains leaves you with $80. Over time, that difference adds up—but here’s the key message: don’t pick an investment just because of the tax rate.
3. Sound Investment First, Taxes Later
As a resident, your financial life is already complex—student loans, long hours, and limited time. The temptation to “chase the best tax result” is understandable, but it’s the wrong starting point.
Your priority should always be:
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Is the investment right for you?
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Does it fit your goals and comfort with risk?
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Can you access the money when you need it?
Once you’ve made a sound investment decision, then it’s time to think about where to hold it for tax purposes.
For example, interest-earning products like GICs or savings accounts are best inside a TFSA or RRSP, where the income can grow tax-free or tax-deferred. Stocks or ETFs that generate dividends or capital gains can be more efficient in a non-registered account once you’ve maxed out your RRSP and TFSA.
4. The Bottom Line
Taxes matter—but they should never drive your investment choices. Make your investment decisions based on what’s sound and sensible for you. Then, structure things efficiently with the help of a professional who understands your career path as a medical resident.
You’ll feel far more confident knowing your money is working the way it should—not just for today, but for your future as a physician.
If you’re curious about how this all ties into whether you should pay down debt or start investing, watch for our companion post: “Invest or Pay Down Debt? How to Decide What’s Right for You as a Medical Resident.” It’s one of the most common and important financial questions physicians face early in their careers.
Summary at a Glance
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Interest income: Money you earn by lending (e.g., GICs, savings). Fully taxable at your marginal rate. Interest on money borrowed to invest may be deductible if the investment earns income.
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Dividends: Your share of company profits. Canadian dividends are taxed at a lower rate due to the dividend tax credit.
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Rental income: Rent minus allowable expenses such as mortgage interest, property taxes, utilities, repairs, advertising, and travel. Fully taxable at your marginal rate.
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Capital gains: Profit from selling investments. Only 50% of the gain is taxable.
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Active income: Earned by working (employment or self-employment).
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Passive income: Earned from investments or assets that produce income without active work.
Next Step
If you’re starting to invest or trying to understand how taxes fit into your bigger financial picture, we can help. Jonathan and his team work almost exclusively with medical residents and physicians, helping you build financial confidence from day one.
Book a complimentary 30-minute chat—no pressure, just straightforward answers about your finances and taxes.
Disclaimer:
This blog post is for general informational purposes only and should not be relied upon as tax or investment advice. Every person’s situation is unique. You should seek advice from a qualified accountant or tax professional before acting on any information contained here.
