Why You Pay Taxes Even When the Stock Market Is Down
Many investors are surprised sometimes frustrated when they receive a tax slip showing that they owe taxes on their non-registered account, even though their overall portfolio has lost value. It may seem illogical at first: if the stock market is down, why does the Canada Revenue Agency want a share of your “losses”?
The answer lies in a fundamental distinction every investor should understand: the tax authority doesn’t tax overall returns it taxes the *taxable income* generated within the account.
The Non-Registered Account: A Taxable Account
Unlike a TFSA or an RRSP, a non-registered account offers no tax protection. Each year, all investment income earned within this account is taxable. Regardless of whether your overall portfolio value has declined, certain types of income generated inside the account can still be taxable.
If you hold bonds, guaranteed investment certificates (GICs), or money market funds, the interest you receive is 100% taxable.
Dividends paid by Canadian corporations are taxable, even if the stock has lost value. You receive a cash payment, so tax applies.
If you sold an asset (stock, ETF, mutual fund) at a gain — even a partial one that gain is taxable. The fact that your overall portfolio later declined does not cancel out the gain that has already been realized.
Some funds (such as segregated funds or mutual funds) automatically distribute income or capital gains. You are taxed even if you don’t sell anything, because these distributions are considered “realized.”
Overall Loss ≠ No Tax
Let’s take a concrete example. You invest $100,000 in a diversified portfolio. During the year, the stock market drops, and your portfolio is worth $95,000 at year-end a $5,000 loss.
However, during the year, you have:
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received $1,500 in dividends;
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realized a capital gain of $2,000 from selling a security, 50% of which is taxable;
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earned $700 in interest.
Result: even though your total value has decreased, you’ve generated $3,200 in taxable income. You will therefore receive a slip (T3, T5, or T5008) to report.
You might be wondering: “What if I sold at a loss?”
Good news realized capital losses (not paper losses) can be used to offset your capital gains, either in the current year, retroactively for the past three years, or carried forward to future years. But these losses must be realized (you must have sold), not just shown on your statement.
In other words, you can’t automatically offset a portfolio decline with tax losses if you haven’t sold anything.
Taxation on investments in a non-registered account doesn’t depend on your portfolio’s overall performance, but on the taxable income flows generated during the year. Even in a market downturn, you may owe taxes if you received dividends, interest, or realized capital gains.
To optimize your tax situation, it’s useful to have regular follow-ups with a professional and to consider strategies such as tax-loss harvesting, diversifying account types (TFSA, RRSP), or adjusting your investment types within the right accounts.
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Canada Revenue Agency (CRA) – *“Taxable Investment Income”*
https://www.canada.ca/fr/agence-revenu/services/impot/particuliers/sujets/revenus-investissements.html
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Financial Markets Authority – ‘Taxation of Investments’
https://lautorite.qc.ca/grand-public/investissements/fiscalite-des-placements
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**Banque Nationale – “Why You Still Pay Tax Even If Your Investments Have Dropped”**
https://www.bnc.ca/conseils/finances-personnelles/impots-sur-les-placements.html
