The Ultimate Guide to Calculating Zakat on Investments in Canada
For Canadian Muslims, bridging the gap between Deen and Dunya often gets complicated when tax season and Zakat season collide. While we know Zakat is a pillar of Islam meant to purify our wealth, applying 1,400-year-old principles to modern Canadian financial vehicles like RRSPs, LIRAs, and ETFs can be confusing.
Based on a recent detailed webinar by Assad Wealth Management featuring Sh. Navaid Aziz and MuslimMoneyGuy (Farooq Maseehuddin), we have broken down exactly how to calculate Zakat on your investment portfolio.
Watch the Full Webinar: While this guide covers the key formulas, we strongly encourage you to watch the full video linked below for a more detailed explanation. The webinar provides a deeper dive into the nuances of these calculations and includes real-time examples that can help clarify complex scenarios for your specific portfolio.
Disclaimer: This information is for educational purposes. Please consult with your local scholar or financial advisor for your specific situation.
The Basics: When is Zakat Due?
Before looking at specific accounts, your wealth must meet two conditions:
Ownership: You must have full ownership and access to the wealth.
Nisab & Hawl: The wealth must exceed the Nisab threshold (the minimum amount of wealth a Muslim must possess before they are obligated to pay Zakat) and be held for one full lunar year (Hawl).
85g of Gold
595g of Silver
Note on Nisab: While there is a difference of opinion between using the Gold or Silver standard, we recommend using the Gold standard (approx. $11,000+ depending on market rates). The Silver threshold is currently very low (approx. $900), which may result in people who are struggling financially paying Zakat. The Gold standard ensures that Zakat is paid by those with true surplus wealth.
Note on Calendar Year: The standard Zakat rate is 2.5% based on the Lunar calendar. However, if you are calculating your Zakat annually based on the Gregorian calendar (e.g., January to December to align with your taxes), you should adjust the rate to 2.577% (or roughly 2.6%) to account for the longer solar year.
How to Calculate Zakat on Stocks, Mutual Funds, and ETFs
When it comes to investments in the stock market, there are generally two accepted methods for calculation:
Method 1: The Simple Option (Cash Method)
Treat your investment portfolio as if it were cash.
Calculation: Take the total market value of your portfolio and pay 2.5% (or 2.6% if using the Gregorian year).
Who is this for? This is the safest method and is akin to doing Ihsan (excellence). It is the default option if you are an active trader (day trading) or if you want to avoid complex math.
Method 2: The Calculated Option (Business Commodity)
This method acknowledges that not every asset inside a company (like their buildings or machinery) is subject to Zakat.
The Rule: You only pay Zakat on the liquid assets of the companies you hold.
The Proxy: Since it is difficult to analyze the balance sheet of every company in an ETF, scholars like Sheikh Hatem Al-Haj allow a 30% Proxy.
Calculation: (Total Portfolio Value x 30%) x 2.5% (or 2.6% if using the Gregorian year).
Effectively, this is roughly 0.75% of your total portfolio value.
Who is this for? Long-term investors who buy and hold.
Zakat on Canadian Registered Accounts
This is where it gets specific for Canadians. Zakat is based on accessibility. If you cannot access the money without a penalty or tax, you may deduct that cost before paying Zakat.
1. Tax-Free Savings Account (TFSA) & Non-Registered Accounts
These accounts are fully accessible. There are no taxes to withdraw your money from the TFSA. Non-Registered accounts may have capital gains taxes, but the funds are generally liquid.
Zakat Rule: The entire amount is Zakat-able.
Calculation: Market Value x 2.5% (or use the 30% proxy method mentioned above).
2. RRSP (Registered Retirement Savings Plan)
While you can access this money, the government imposes a withholding tax immediately upon withdrawal, and it is added to your taxable income. You do not effectively own the portion that goes to the CRA.
Zakat Rule: Deduct the estimated tax/penalty before calculating.
Calculation:
Step 1 (Net Value): Market Value – Estimated Taxes (e.g., 30–40%) = Net After-Tax Value.
Step 2 (Zakat): Apply 2.5% (or 2.6%) to the Net After-Tax Value.
Advanced Note: If your RRSP holds long-term stocks/funds, you may also apply the 30% proxy to the Net After-Tax Value before calculating the final Zakat percentage.
3. LIRA (Locked-In Retirement Account)
These funds are generally inaccessible until a specific age (usually 55+).
Opinion A (Hanafi): No Zakat is due until you actually access the money.
Opinion B (Maliki): Pay Zakat on it once only when you have accessed it
Opinion C (Shafi'i/Hanbali): Calculate it every year, and pay it all cumulatively when you finally access the money.
Recommendation: Many choose to pay annually on the net value to avoid a massive bill later, but verify with your scholar.
4. RESP (Registered Education Savings Plan)
The RESP is unique because it consists of three parts: your contributions, government grants (CESG), and growth.
The Complexity: The government grants do not belong to you until the child uses them for education. If you collapse the plan early, the government takes the grants back.
Zakat Rule: You generally do not pay Zakat on the grant portion.
Recommendation: You can either:
Pay annually: Calculate the total market value and subtract the government grants (usually 20% of contributions). You then pay 2.5% (or 2.6%) on the remainder.
Pay upon access: Wait until the funds are withdrawn for the child’s education, and pay Zakat on the cumulative amount then.
5. Employer Pensions, Group retirement Plans, cpp and oas
CPP & OAS: Since these are mandatory government plans that you cannot access or borrow against, they are not Zakat-able until you actually receive the payments.
Group RRSP / DCPP (Defined Contribution):
If Accessible: If you are allowed to withdraw the funds (even with a penalty), it is Zakat-able. Deduct the taxes and pay 2.5% (or 2.6%).
If Locked-in: If your employer restricts withdrawals until you retire or quit, it is treated like a LIRA (see above). The employer’s matching portion is generally not Zakat-able until it vests and becomes accessible to you.
6. Corporate Investment Accounts
For business owners holding investments inside a corporation:
Zakat Rule: Zakat is due on the net retained earnings and liquid assets (cash/investments) sitting in the corporation.
Calculation: You can pay from the corporation directly, or withdraw the funds to pay personally. If withdrawing, calculate the Zakat due on the remaining amount after personal income taxes are deducted.
Special Asset Classes: Real Estate & Crypto
Real Estate
Primary Residence: No Zakat is due on the house you live in.
Rental Property: No Zakat is due on the market value of the building itself. Zakat is due on the total annual net rental income (profit) generated during the year.
Calculation: (Monthly Rent - Expenses) x 12 months = Annual Net Income. Pay 2.5% (or 2.6%) on this total amount, regardless of how much is currently left in your bank account.
Property for Resale (Flipping): If you bought a property with the express intention to sell it for profit (business inventory), Zakat is due on the entire market value of the property.
Cryptocurrency
The Rule: Crypto is treated as cash/currency.
Calculation: It is 100% Zakat-able at current market value. The "30% Proxy" used for stocks does not apply here because crypto is considered a liquid currency, not a business commodity with overhead assets.
The "Cheat Code": ZakatView Calculator
Why use it? Most online calculators don't account for Canadian tax implications (like the withholding tax on RRSPs). This tool allows you to toggle between the "Short-term Trading" (100% value) and "Long-term Investing" (30% proxy) methods, and helps calculate the net Zakat-able worth of your registered accounts.
Frequently Asked Questions
Q: Can I deduct my mortgage or debts from my Zakat calculation?
A: There are differing opinions. Some scholars allow deducting payments due in the immediate future (e.g., the next month or year), while others say long-term debt (like a mortgage on a wealth-generating asset) does not reduce your Zakat liability. It is safer to only deduct immediate short-term liabilities.
Q: I missed paying Zakat in previous years. What do I do?
A: You must estimate the amount owed for those years and pay it now. It is a debt owed to Allah (SWT).
Q: Is my tax refund Zakat-able?
A: Only once you receive it. You do not pay Zakat on a tax refund while it is still with the CRA. Once it hits your bank account, it becomes part of your liquid assets.
Final Thoughts
The goal of Zakat is not to burden you, but to purify your wealth. Whether you choose the conservative "Cash Method" (paying on the total value) or the scholarly "Calculated Method" (paying on 30% of the portfolio), the most important step is the intention to fulfill this pillar of Islam.
Need help structuring your portfolio in a Halal way? Visit assadwealth.ca for comprehensive financial planning that respects your values.