Normally, when you sell an investment for more than you paid for it, you must claim a capital gain. This is usually the result of selling (or property that is “considered” sold) physical property (real estate) or securities in the form of stocks etc. Although capital gains are taxed lower than interest income, you must still pay income tax on 50 percent of your profits, up to the lifetime exemption.
There are a few ways to lower the amount of capital gains you have to pay, including designating your investment property as your principal residence, delaying the sale of investments until after Dec. 31 and donating investments to charities.
What Is a Capital Gain?
To encourage investment in riskier options such as stocks and mutual funds, the government offers favourable tax treatment. When you sell a stock or mutual fund at a profit, you claim a capital gain in the current tax year. Unlike interest income where the full amount of your profit is taxable, only 50 percent of your profit is taxable from capital gains. For example, if you sell stock in ABC Company for a profit of $300, only report capital gain on half of the amount, or $150.
Capital Gains on Real Estate
Normally, you must pay capital gains taxes when you sell an investment property. However, if you lived in the property for part of the year and it qualifies as your principal residence, you may be able to claim it as your principal residence in certain years and avoid paying capital gains. File Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), to designate your investment property as your principal residence with the Canada Revenue Agency.
Note: If you are buying property to fix and flip as investments, the principal residence exemption does not apply. The income is fully taxable.
Capital Gains on Investments
A simple way to reduce your capital gains in the current tax year is to wait until after Dec. 31 to sell your investment. If you are near the end of the tax year, wait until the following calendar year to sell. You do not have to claim the capital gain on this year’s tax return; you can wait a full calendar year to claim your capital gain.
Consider selling stock at a loss in the current tax year to offset any capital gains. Also use net capital losses from previous tax years to offset capital gains in the current tax year. Refer to your notice of assessment for the amount of net capital losses you have to carry forward.
Donating investments is a good way to reduce your capital gains. If you make charitable donations each year, consider donating the stock to charity instead. For example, if you normally donate $500 to ABC Charity, donate $500 worth of stock. By donating your stock directly to the charity, you save a lot of taxes. If you had sold the stock, you would have had to pay capital gains and your donation would have been substantially less.