Capital gains are the increases in the value of assets that you own, such as stocks and property. In Canada, taxpayers are liable for paying income taxes on 50% of the value of their realized capital gains in a given year.
There are several legal methods such as sheltering, deferring capital gains, and donating to charity, that can reduce your tax burden. There are a few more ways and it would be advisable to discuss your options with an expert.
Earnings in a Registered Account
As long as your investments remain inside a registered account, they are left to grow tax-free. You can buy and sell stocks at your leisure with no immediate tax consequences.
One of the most popular accounts is an RRSP (Registered Retirement Savings Plan). Whatever profit you make inside a registered account isn’t taxed as the profit is earned.
You will only be taxed when you withdraw money since you received a tax deduction when you contributed.
Similar to an RRSP a Tax-Free Savings Account (TFSA) allows you to keep any profit earned from buying or selling. Since you already paid tax on your contributions, you do not get taxed from the CRA on the same money twice and can withdraw any amount free of tax. These are especially good for young people.
Registered Education Savings Plans (RESPs) are regulated accounts used for saving money for a child’s post-secondary education. The main benefit of an RESP is the government matching component. Your child will pay tax on the growth and government components in the withdrawals, but since their income is likely going to be very low while they’re students, the rate will be minimal.
Defer Capital Gains
You can defer paying capital gains tax for your shares only when you received them from a spouse or parent due to death or divorce. For example, if your spouse bought 100 shares of a stock and then transferred them to you in the divorce, neither of you will have to pay capital gains tax on it at that time. You only owe capital gains tax once you sell the shares. The profit or loss is calculated from the value at the time your spouse purchased them, not when they gave them to you.
Donate your shares to charity
As an alternative to donating cash to charity, you can donate your shares. It’s a tax-efficient way of doing something good. You get a donation tax credit based on the market value of the shares at that time helping offset the capital gain if any.
As mentioned above, to find out all the ways you can reduce Capital Gains Tax in Canada contact a knowledgeable professional.
Scott Gray, CPA, CMA is a full-service accounting practice based in Oakville, Ontario, offering a broad range of services to meet the needs of businesses, entrepreneurs, and individuals in Oakville, Burlington, and surrounding areas.