Danielle Kubes is a trained journalist and investor who has written about personal finance for the past six years. Her writing has been published in The Globe and Mail, National Post, MoneySense, Vice and RateHub.ca. Danielle writes about investing and personal finance for Wealthsimple. She has a Bachelor of Humanities from Carleton University and a Master of Journalism from Ryerson University.
So, you want to avoid capital gains tax. It’s hard — and, um, illegal — to avoid paying income tax entirely, so please don’t do it. We’ve seen enough celebrity oopsies to know better than that. But if you are wondering how to limit capital gains taxes (the legal way), there are strategies you can use.
The capital gains tax is a way for the CRA to collect revenue on the profit you make from investments.There is no specific “capital gains tax rate,” but instead, the taxable portion of capital gains is included in your total income, making it subject to your marginal tax rate.
Assuming you’re not acting on behalf of a corporation or trust, with capital gains tax, you’re charged tax on 50% of your gains up to $250,000, and then 66.67% for any gains beyond that (good job, you!). So if you had capital gains of $310,000 in a year, you would owe taxes on $165,000 of it. That’s 50% of the first $250,000 (so $125,000), plus 66.67% of remaining $60,000 (so $40,000).
Considering you would pay your full marginal rate on any additional employment income, that’s actually a good deal! Even if it doesn’t always feel like it. And of course, it doesn’t mean your tax hit won’t still be significant.
That’s where these strategies come in. Through employing fully legal methods such as sheltering and offsetting, you can reduce your tax burden. Here's how to do it:
1. Put your earnings in a tax shelter
Tax shelters act like umbrellas that shield your investments. As long as they remain inside a tax shelter, your investments are left to flourish duty-free, which means you can buy and sell stocks at your leisure with no tax consequences. The one downside? You don’t get to write capital losses off your total income.
A Registered Retirement Savings Plan (RRSP) is a common account used to save and shelter gains from taxes. Any profit you make inside an RRSP isn’t taxed right away. It’s not until you withdraw money. It will be at your full marginal rate, but since most people make withdrawals during retirement, when their income is lower, their marginal rate is lower too.
A Tax-Free Savings Account (TFSA) works similarly to an RRSP in protecting against capital gains. The biggest difference is that the money you put in a TFSA has already been taxed, so when you withdraw it (along with any extra earnings), you’re not taxed at all. While the annual contribution limit has fluctuated between $5,000 and $10,000 since its inception, if you contribute about $6,000 each year (keeping in mind the annual contribution limits so you don’t get dinged with an over-contribution penalty) with after-tax dollars, and invest that money over 30-50 years, you could, hypothetically, see it grow to a significant sum, and that amount wouldn’t be taxed a cent when you withdrew it.
A Registered Education Savings Plan (RESP) is another tax shelter you can use to avoid capital gains tax. RESPs help you save for your child’s education. When it’s time for them to withdraw the money, your child will be taxed, but presumably at very low rate, since most kids aren’t exactly raking it in as students.
2. Offset capital losses
Let’s talk wins and losses. If, in the same year, you earn a $1,000 profit from selling ABC stock (fist bump!), but lose $1,000 when you sell XYZ stock (argh!), then your profit is effectively zero. The win and loss cancel each other out, and in that case, you won’t have to pay any capital gains tax.
But what if this wasn’t exactly your year and you have only losses to report? Here’s where the strategy comes in: you can carry your losses forward indefinitely or backward up to three years, applying them to different years to offset any gains you’d be taxed on. There are even some instances where you can claim your capital losses against other kinds of income, but you should consult a qualified accountant to discuss this strategy.
(One quick thing to note here: in order to properly offset capital losses, you have to have a real loss — you can’t just sell a stock and quickly re-purchase it. You also can’t sell a stock and tell your spouse to buy it. That’s considered a “superficial loss,” which the CRA will pick up on and doesn’t allow.)
There is, however, a rather clever way to work around this. It’s called “tax-loss harvesting,” in which you purposely sell an investment that has decreased in value while purchasing a similar (but not identical) investment. Say you really believe in the cannabis sector (duuuuuuude). You bought shares in a cannabis company at $1,000, but those shares dropped to $500. You sell the stock, claim the $500 loss, and then immediately purchase a different cannabis stock or an exchange-traded fund. Therefore, you’re reducing your tax burden but still potentially capturing gains in a sector you’re confident will go up (although there are no guarantees).
3. Defer capital gains
This isn’t really a strategy, but you can defer paying capital gains tax for your shares when you got them from a spouse or common-law partner due to death or divorce. So, if your spouse bought 100 shares of ABC 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 owe capital gains tax only after you sell the shares. A profit or loss is calculated from the value at the time your spouse purchased them, not when they gave them to you.
4. Take advantage of the lifetime capital gain exemption
The lifetime capital gains exemption applies to some small business owners when they sell private qualifying shares, and farm and fishery property. Shares that qualify are those in a company that actively operates in Canada and is owned by Canadians. Additionally, the taxpayer or a relative must have owned the shares for at least 24 months prior to the sale. The rules for this are complex, so consult a qualified tax professional. There is no lifetime capital gains exemption for publicly traded stocks.
5. Donate your shares to charity
Need more incentive to do a good deed? Instead of donating cash to charity, you could consider donating your shares instead. It’s a tax-efficient way to score some karma points. Not only is the “profit” from the shares considered zero, but you actually get a donation tax credit based on the market value of the shares at that time.
6. Use capital gain reserve
It may be possible to spread the proceeds of a capital property sale over five years. Because Canada has a progressive tax system, we are taxed more for every additional dollar we make. Say you sell a capital property, like an investment condo, to your children for a profit. Instead of paying the full tax in year one, you could coordinate with your kids to spread that gain out over five years so your marginal tax rate drops to a lower bracket, allowing you to keep more money in your pocket. In order for this to work, the buyer has to actually spread out their payments to you over that time so kiss that lump sum goodbye. (This can also get a little risky: the buyer could default on their promise as the years go by.) However, if you’re transferring certain kinds of property, like a family farm, to your children or grandchildren, it may be possible to spread out the gain over 10 years.
Frequently asked questions
Capital gains are the increases in value of assets that you own, such as stocks and property. The government likes to consider a portion of this gain as income so that making money in this way doesn’t occur tax-free. In Canada, taxpayers are liable for paying income taxes on 50% of the value of their capital gains in a given year. This means that you must take half of whatever you made in capital gains, add that amount to your income, and then subject that total income to income tax. The tax rate applied to the taxable portion of your capital gains will vary depending on your income and tax situation.
If you own and are planning to sell rental property in Canada, you have limited options for avoiding paying capital gains tax on 50% of the profit on the property. However, it can be advantageous to sell at a specific time. If it’s getting toward the end of a tax year when you decide to sell, consider postponing the sale until after the new year to push the capital gain recognition into the next tax year. Doing this can delay your tax payment. That said, if your income is variable, you may not want to put it off because the gains can also serve to reduce the amount you pay in tax. For instance, if your income in the year the gains are recognized is lower than usual, you may pay a lower income tax rate and, thus, less tax on the capital gains. Another strategy is to match the sale of the property on which there is a gain with the sale of an asset on which you’ve taken a loss. If you sell these in the same tax year, the loss will cancel out some amount (or all) of the gain, reducing the amount on which you owe tax.
Rules about capital gains tax on a second property in Canada are the same as those that apply to any other asset. Whether the second property is a vacation house, a home in another location, or an investment property, all that matters (from a tax perspective) is that it isn't considered your primary residence. This means that you cannot apply the principal residence exemption (which states that you do not owe capital gains on the profit from the sale of your primary residence) to the sale of a second property.
The types of income on which you pay capital gains tax in Canada are income from things like the sale of stocks or property (except your principal residence) or gifts of capital if those gifts produce income. Income of all of these types is considered taxable to some extent at a given taxpayer’s income tax rate for the year in question. There can also be other types of income you may pay tax on, so if you’re unsure it’s best to contact an accountant or tax specialist.
While there are some elements that can be open to interpretation, the Canada Revenue Agency (CRA) isn’t fully clear about exactly how long you must own your primary residence in order to take advantage of the principal residence exemption, which says that you don’t have to pay tax on capital gains on the profit on your home as long as it is your primary residence. The CRA rules just state you have to “ordinarily inhabit” the place for a “short period of time,” which, lucky for you, seems open to interpretation. That being said, even if you live in the property and are in the business of flipping and selling it before 365 days, you won’t be charged capital gains, but it WILL be deemed as business income - and that can be taxable.
The main way of avoiding paying capital gains tax on inherited property in Canada is to make that property into your primary residence. If the home was the primary residence of the person who passed it on to you, then you or the estate will not owe capital gains tax upon your taking possession. This is due to the principal residence exemption. However, if you then turn around and sell that property, you’ll be liable for capital gains tax on 50% of the gain.
The lifetime capital gains exemption is a rule that pertains to some small business owners. It provides an exemption up to a certain amount over their lifetime for the sale of private qualifying shares of businesses and of farm and fishery property. Qualifying shares are those in a private company that is in active operation and has majority Canadian ownership. To qualify for the exemption, the shares must have been owned by the taxpayer or by a relative of the taxpayer for at least 24 months prior to the sale.The lifetime capital gains exemption does not apply to publicly traded stocks.
Last Updated June 26, 2024
File with Wealthsimple Tax. Maximum refund, guaranteed.
Get started for free
