If you invest in rental property, stocks and bonds, the profits you earn are subject to capital gains tax in Canada. While taxes are a cost of investing and earning income, there are ways to reduce your tax bill and benefit from your investments.
If you are serious about getting the most out of your investments, optimizing your profits and successful long-term financial planning, reach out to Taxpage tax lawyers. They’re experts in tax planning and, crucially, as tax lawyers, they know Canadian tax laws inside and out.
What is Capital Property?
Generally speaking, the Canada Revenue Agency (CRA) classifies capital property as investments and purchases that are intended to increase over time and possibly generate income.
Examples of capital property given on the CRA website include:
- Property you buy, such as land, buildings, equipment, and tools, that is used to generate income through a business or a rental property.
- Investment securities like bonds, stocks and units of a mutual fund trust.
If you make a profit when disposing of capital property, that is a capital gain, and you are required to pay tax on 50% of your gains at your marginal tax rate.
Basic Strategies for Reducing the Tax on Your Capital Gains
Below are just some of the ways you can reduce your capital gains tax amounts:
- Investing in tax-sheltered and tax-free accounts can help you save money on capital gains taxes. In Canada, a tax-free savings account (TFSA) allows you to avoid paying taxes on income produced within the account, including capital gains. By putting your capital gains in an RRSP or TFSA, you can lower your taxed capital gains. RRSP gains are not taxed until they are withdrawn, so you can withdraw lesser sums and avoid any capital gains tax. TFSA gains are never taxed. It should be noted, however, that capital losses in registered accounts cannot be used to offset profits in other accounts.
- As a business owner, you may qualify for the Lifetime Capital Gains Exemption (LCGE), under which company owners can use the exemption to avoid paying capital gains tax when selling certain capital property that qualifies for the exemption, such as certain small business shares and farm and fishery property.
- You can also reduce your capital gains taxes by carefully arranging how you dispose of your capital gains and losses. For example, you may opt to sell capital property in a lower-income year or employ capital losses in a year with larger capital gains.
- Donating to charity is a fourth option for reducing capital gains. Since capital gains are calculated based on the difference between what you paid for an asset and its current value, you can avoid paying taxes on the gains if you donate the asset to a charity. Not only will you be supporting a cause you care about, but you’ll also receive a tax credit for more than you paid for the property.
- You can sometimes also easily defer capital gains tax for a year by disposing of the asset early in the new year instead of in December.
Navigating Canadian tax laws can be complex, and minimizing your obligations, such as capital gains tax, requires the help of a tax expert.
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