Let’s face it! Most Canadians probably find income taxes boring (unless of course, you’re an accountant!). But paying your income taxes is a necessary evil!
If you have sold stocks or other investments at a profit, you will have to pay the tax on your capital gains.
A Quick Note About Your RRSP or RRIF
If you have stocks or other investments inside of your RRSP or RRIF, any gains generated on those investments are not taxable. However, withdrawals are fully taxed at your marginal tax rate at the time you withdrew from the account.
Remember that the government wants you to save for your retirement using the RRSP and allows you to deduct deposits and allows your investments to grow tax-free … until you withdraw from the account: And hopefully in a lower tax bracket.
What About The TFSA?
Like an RRSP or RRIF, investment income in the TFSA will grow tax free. However, there are no tax consequences if you deposit or withdraw from the TFSA.
From here on, I will refer to the RRSP, RRIF, and TFSA collectively as registered accounts.
What Is A Capital Gain?
When you sell your stocks, in a non-registered account, for more than you paid for it, the difference between the selling price and purchase price (less commissions) is called a capital gain. In Canada, capital gains offer a tax advantage because only 50% of the net capital gains are taxable.
Notice the phrase net capital gains?
If you had capital losses in the tax year, you are required to offset them against your capital gains from the same tax year. If you have losses left over, you can use them against any net capital gains in the last three years or use them against any capital gains in the future. However, you cannot use capital gains against other income (interest, dividends, employment income etc.).
If you dispose of the shares of a qualified small business corporation or qualified farm property you can shield $750,000 of the gain from tax! ?In 2007 government in increased the lifetime capital gains exemption to $750,000.
Watch Out For Superficial Losses
If you’re frequently buying and selling stocks and you have losses, be aware that if you (or a person related to you), owned the same stock 30 days before or after you sold the shares, your loss will be denied. You should read my article on Superficial Losses for more on this.
Tax Tips For Capital Gains
- Maximize Tax Efficiency – Keep your capital gains generating investments outside of your registered accounts and your interest generating investments inside your registered accounts.
- Tax Loss Sell – If you have shares that have lost value at the end of the year, consider selling them to offset and capital gains. Be aware of the superficial loss rules.
If you have significant trades outside of your RRSP’s, a professional accountant will understand the implications of capital gains and can advise you on appropriate strategies to pay less tax.