How to Reduce Capital Gains Tax: Canada’s capital gains tax inclusion rate increased on June 25, impacting 99.9% of Canadians, disputed by industry groups, medical professionals, and farmers.
Corporate executives, wealthy business owners, real estate speculators, and those with an average income over $1.4 million must now pay tax on two-thirds of gains over $250,000 annually.
Capital gains accrue when selling assets, with inclusion rate taxing the filer’s marginal rate. Good tax strategy can avoid capital gains tax at any rate.
Tax-Free Savings Account (TFSA) Investments
- TFSA is the most tax-efficient investment method.
- Capital gains or income are never taxed.
- The total TFSA contribution limit was expanded by $7,000 on Jan. 1, providing additional space for non-compliant Canadians.
- Allowable amounts are carried forward each year.
- Total contribution space varies based on contributions and withdrawals.
- Since 2009, the total allowable amount is $95,000.
- As Ottawa continues to expand, long-term investors will benefit from significant tax shelter.
Balance TFSA with RRSP Investments
- TFSA, originally a short-term savings vehicle, has evolved into a retirement tax-planning tool.
- RRSP contributions grow tax-free but are fully taxed at the individual’s marginal rate when withdrawn.
- With proper planning, RRSP withdrawals can be capped at the lowest marginal tax rate and topped up with tax-free money from a TFSA.
- Both RRSPs and TFSAs can hold any type of investment.
- Non-registered investments cannot be transferred to a registered account; investors must sell the investment first and pay the capital gains tax.
- Capital losses from non-registered equities can offset capital gains.
The Decline of Second Property Investments: A Closer Look
- Capital gains on principal residences are tax-free, making home ownership tax-efficient.
- Capital gains tax applies to sale of additional properties, increasing inclusion rate to two-thirds if capital gain exceeds $250,000.
- Example: High-income earner in Ontario with $300,000 capital gain from selling a second property would pay 50% of the gain plus two-thirds, resulting in a tax payment of $158,333.
- Higher tax rate is part of federal government clampdowns on second property tax perks.
- Investors can buy REITs in their TFSA for diversified real estate exposure.
- Over RRSP and TFSA limits can be avoided by donating spillover capital gains to a registered charity.