(We take a close look at how to use your RRSP to maximize your tax savings in our new FREE report, “Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities.” Click here to download your copy and get started right away.)

Holding speculative stocks in your RRSP can increase your capital gains tax

One key rule is that it’s best to hold speculative investments outside your RRSP. Losses are inevitable with speculative investments. If you hold them outside your RRSP, losses provide you with tax-deductible capital losses that can reduce your payable capital gains tax. Inside your RRSP, losses simply reduce the capital you have available to take advantage of an RRSP’s tax-deferral power.

It’s especially crucial to observe this rule when you’re young. Your RRSP’s tax-deferral power continues until you take all the money out, and by then you may be in your 90s. A capital loss in your RRSP deprives you of this benefit, which is the most valuable part of an RRSP.

There is something to be said for holding interest-paying investments and foreign stocks in your RRSP, and Canadian stocks outside of it. That’s because dividend income from Canadian stocks is eligible for the dividend tax credit, where interest income and foreign dividends get taxed as ordinary income.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

High-quality stocks beat bonds as RRSP investments

Some financial planners say that stocks are too speculative to hold in an RRSP, because of the risk. That view made sense a decade or two ago, when interest rates were two or more times higher than they are today.

Now the situation has reversed. With interest rates now at historic lows, bonds can’t go a lot higher than they are. In fact, it seems more likely that rates will hold steady or rise slightly in the short term, and move higher still in the long run. That means bond investors would only earn interest income on their bonds; instead of capital gains, their bond holdings could produce capital losses.

In our view, that combination of high bond prices and the risk of higher inflation makes even the highest-quality bond portfolio more speculative than a well-designed stock portfolio. That is, a stock portfolio that’s built according to our three-part investment strategy: invest mainly in well-established companies, downplay stocks that are in the broker/public-relations limelight and spread your money across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities).

As a member of TSI Network, you may have already seen Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities. If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share the report with a friend by forwarding this email to them. It’s my “thank you” just for signing up for my free daily updates.

(Our new free report, “Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities,” is packed with simple strategies you can use to shift more of your income to capital gains. Click here to download yours and get started right away.)

You have to pay capital gains tax on profit you make from the sale of an asset. An asset can be a security, such as a stock or a bond, or a fixed asset, such as land, buildings, equipment or other possessions. However, you only pay the tax on a portion of your profit. The “capital gains inclusion rate” determines the size of this portion.

Several years ago, the Canadian government cut the capital gains inclusion rate from 75% to 50%. This cut taxes on capital gains by one-third, and had the effect of lowering the overall rate you pay on capital gains to one-half of what you would pay on income or interest.

By the numbers: tax on capital gains

For example, if you buy stock for $1,000 and then sell that stock for $2,000, you have a $1,000 capital gain (not including brokerage commissions). You would pay capital gains tax on 50% of the capital gain amount. This means that if you earn $1,000 in capital gains, and you are in the highest tax bracket in, say, Ontario (46.41%), you will pay $232.05 in capital gains tax on the $1,000 in gains.

In contrast, interest income is fully taxable, while dividend income is eligible for a dividend tax credit in Canada. In the 46.41% tax bracket, you’d pay $464.10 in taxes on $1,000 in interest income, and you would pay $230.60 on $1,000 in dividend income.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

You choose when to pay tax on capital gains

One of the main advantages capital gains have over other forms of investment income is that you control when you pay capital-gains tax. This amounts to a very simple and highly effective way of deferring tax — and it’s perfectly legal.

You pay capital gains tax on a stock only when you sell, or “realize” the increase in the value of the stock over and above what you paid for it. In contrast, interest and dividend income are taxed in the year in which they are earned.

As an added bonus, if you sell after you retire, you may be in a lower tax bracket than you are when you are earlier in your investing career. In any event, the longer you hold onto a profitable stock and put off paying capital gains tax, the longer all of your money works for you.

This can have a significant impact on your long-term returns. To continue with the example above, if you buy stock for $1,000 and then sell that stock for $2,000, you will pay $232.05 in capital gains tax. That would leave you with $1,767.95 to reinvest (not including brokerage commissions).

However, if you hang onto the stock, you keep the full $2,000 working for you until you choose to sell. That holds out the potential for even further gains, and the possibility of paying less tax on your capital gains if you sell after you retire, when you may be in a lower tax bracket.

As a member of TSI Network, you may have already seen Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities. If you haven’t yet read this new free report, click here to download your copy today. I’d also encourage you to share the report with a friend by forwarding this email to them. It’s my “thank you” just for signing up for my free daily updates.

Click here to immediately download our new free report, Capital Gains Canada: 7 Secrets for Managing your Canadian Capital Gains Tax Liabilities.

As you consider how to manage your tax bill for the current income-tax season, you really shouldn’t be without our new free report, Capital Gains Canada: 7 Secrets for Managing your Canadian Capital Gains Tax Liabilities.

Issues of taxation can be confusing to all investors, whether they’re experienced or just starting out. But there are a number of easy solutions to cutting your capital gains taxes that many investors overlook when filling out their tax returns. If you continue to miss out on these breaks year after year, you could be losing out on significant tax savings! You could also end up paying more tax than you owe.

The 7 powerful secrets in this exclusive new report could save you thousands in taxes on your investments. What’s more, these 7 secrets are all clearly spelled out in plain English. You get clear, specific strategies that you can use to better manage your capital-gains tax liabilities — and start cutting your tax bill — right away.

And best of all, this exclusive report is yours FREE.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

Here’s just some of what you’ll read about in this new free report from me, Pat McKeough, and TSI Network:

• A simple way to understand Canadian capital gains tax and how it affects your investments.
• How RRSPs can actually cost you money.
• The tactic you can use to delay taxes and lower them at the same time
• How to make the most of changes to charitable-donation laws
• And much more…

Capital gains are one of the lowest-taxed forms of income in Canada. Of course, all three forms of income — interest, dividends and capital gains — have a place in a well-planned investment portfolio. But you can significantly lower the tax you pay by structuring your portfolio so that more of your taxes are on capital gains. In this free report, you’ll learn how to do just that.

This report is the second in a series of free reports I’ve written as free downloads on TSI Network. I wrote the first report, Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada to give investors of all skill levels a set of guidelines for maximizing the returns on their investments.

To get started right away, click here to download your copy of Capital Gains Canada: 7 Secrets for Managing your Canadian Capital Gains Tax Liabilities. I’d also encourage you to share the report with a friend. It’s my “thank you” just for signing up for my free daily updates.

To calculate your total capital gain on a share you sold during the previous tax year, subtract the adjusted cost base of the shares you sold from the total proceeds of the sale. The adjusted cost base of the shares is equal to the cost of the shares plus any costs associated with owning them, such as brokerage commissions.

Say, for example, you bought 1,000 shares of Canadian National Railway at $10 per share years ago. When you made the purchase, you paid $50 in brokerage commissions. When the stock reaches $60 per share, you decide to sell. Your proceeds from the sale are $59,950 ($60 per share multiplied by 1,000 shares minus $50 in brokerage commissions) and your adjusted cost base (the cost of purchase) is $10,050 ($10 per share multiplied by 1,000 shares, plus the $50 in commissions).

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

If you’ve bought shares of the same company more than once, the adjusted cost base you need to calculate your capital gains tax is equal to the average cost of each share. You can determine the average cost by dividing the total cost of all the shares you’ve purchased by the total number of shares you hold.

Dividend payments don’t affect your capital gains tax — unless they’re reinvested

Dividend payments in cash do not change the shares’ adjusted cost base. You pay tax on the dividends as received at the rate on dividends, not capital gains.

However, if the dividend payments are reinvested in additional shares of stock, then the total cost and total number of shares change after each new dividend reinvestment, and you must recalculate your adjusted cost base. Note that you must still pay taxes on reinvested dividends.

Some trust distributions and dividends actually lower your adjusted cost base

As well, portions of some distributions from income funds are treated as a return of capital for capital gains tax purposes. They are non-taxable when you receive them, but instead they lower your adjusted cost base for tax purposes. So they leave you with a bigger capital gain or lower capital loss when you sell.

However, this will change just over a year from now, on January 1, 2011. That’s when Ottawa’s new income-trust tax kicks in. After that date, distributions of most trusts will be treated the same as dividends from regular corporations.

If you’d like me to personally apply my value-investing approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

One kept the EnCana name and trading symbol, and focuses on unconventional natural gas. The other operates as Cenovus Energy Inc. and specializes in oil-sands projects, oil refineries and conventional natural gas.

The new EnCana accounts for about two-thirds of the original company’s production and reserves. Cenovus accounts for the remaining third.

Shareholders received one share in each of the two new firms for every EnCana share they owned. Investors will not have to pay capital-gains taxes until they sell their new shares.

We see both EnCana and Cenovus as holds.

For example, December 24 is the 2009 deadline for tax-loss selling on the Toronto Stock Exchange. If you sell at a loss on or before that date, you could deduct your loss against your 2009 capital gains. However, you can also carry your loss back for the three previous years (2008, 2007 and 2006), or carry it forward indefinitely to offset past or future capital gains.

Beware of the “superficial loss rule” when using tax-loss selling to lower your Canadian capital gains tax

If you are considering making use of tax-loss selling to minimize capital gains, you should be aware of the “superficial loss rule.” This rule states that if you, your spouse or a company you control buys back a stock or mutual fund within 30 days of selling it, you are not permitted to claim the capital loss for tax purposes. If you fail to obey the 30-day rule, your capital loss will be disallowed.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

However, there are some ways to maintain stock-market exposure during the 30-day period. For example, if you decide to sell resource shares that you bought at their 2008 highs in order to realize a capital loss, but then you decide that resource stocks are poised to rise further, you can buy a resource-heavy mutual fund to keep yourself exposed to that sector. Or you could buy shares in a company that is in a similar business as the one you sold (such as TransCanada Corp. and Canadian Utilities).

Canadian capital gains tax should be a secondary consideration when deciding whether to sell stocks

It’s always a good time to sell bad stocks, or stocks that are wrong for your portfolio. But you need to balance that rule against the fact that in the final couple of months of the year, some investors dump stocks without thinking, just to cut their taxes. In some cases, they simply want to sell and be done with it. In others, they intend to buy the stock back after 30 days (but as we mentioned, if you buy back any sooner, you cannot deduct your loss.)

As a result, stocks that have been weak tend to stay weak in the final month or two of the year. But the best of the bunch can put on extraordinary recoveries when tax-loss selling season ends.

Our advice: don’t let tax considerations spur you to make a costly mistake. You can always sell next year and carry your loss back.

If you’d like me to personally apply my value-investing approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.

This was her first experience with a concept that is ignored in some commission-earning circles: Sometimes it’s better to just pay the taxes.

Too much focus on capital gains tax can hurt profits

Back when she was dealing with a broker and sold anything at a profit, her broker would always suggest that she sell anything on which she had a loss. That way, she could “nail down a tax loss” and reduce or eliminate any capital gains tax she had to pay that year.

As a side benefit, she rarely suffered a big loss on any stock, since she sold most of her losers before they fell too far. However, she often noted that she also sold all too many of her best stocks at just the wrong moment, when they were going through a short-term downturn just prior to a big rise. She rarely had a big loss, but big gains were even rarer.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

When a series of gains put her in a position to pay capital gains tax, she offset it by catching up with RRSP contributions, or buying tax shelters. The tax shelters were highly effective at sheltering her income from tax. They were less effective at making any money for her. In fact, none of her tax shelters left her with anything better than a modest gain. She lost money on some of them, even after allowing for the tax benefits.

Most of her 2008 gain was from a holding in Fording Coal, on which we more than doubled her money for her. Teck Resources (Toronto symbol TCK.B) bought Fording last October, right around the time when the rest of the market was falling sharply. We had no control over the timing of that sale. We could have sold some of her losers to offset a modest part of her Fording gain, but we felt the timing was exceptionally poor in light of the drop in share prices.

Tax shelters: A great way to make money for your broker

When our client asked why we didn’t put any tax shelter in her account to offset the Fording gain, we explained that we generally stay out of tax shelters at Successful Investor Wealth Management Inc. These include such things as the flow-through limited partnerships that are sold by some brokers.

In fact, we stay out of them even more consistently than we stay out of new issues. The reasons why are similar. Neither tax shelters nor new issues are priced according to the interplay of well-informed buyers and sellers, as they are with an investment that is already trading on a stock exchange.

Instead, the sponsors of these investments decide what they are worth, and then pay brokers two to three times the normal, full-service commission rates to sell them to the public at that price. As a result, new issues and tax shelters generate far more than a random share of weak performing, if not disastrous, investment results.

In the end, of course, it’s not as if she has missed out permanently on a tax advantage. To offset capital gains, you can carry capital losses back three years, or forward indefinitely. The only drawback is that carrying the loss forward to reduce taxes in a future year amounts to an interest-free loan to the government. But with today’s low interest rates, that’s the least costly approach to dealing with capital-gains taxes.

If you’re looking for sound portfolio management, you may be a good candidate for our Successful Investor Wealth Management service. Click here to learn more.

With stocks, you only pay capital gains tax when you sell or “realize” the increase in the value of the stock over and above what you paid for it. (Although mutual funds generally pass on their realized capital gains each year.)

Several years ago, the Canadian government cut the capital gains inclusion rate (the percentage of gains you need to “take into income”) from 75% to 50%.

For example, if an investor purchases stock for $1,000 and then sells that stock for $2,000, then they have a $1,000 capital gain. Investors pay Canadian capital gains tax on 50% of the capital gain amount. This means that if you earn $1,000 in capital gains, and you are in the highest tax bracket in, say, Ontario (46.41%), you will pay $232.05 in Canadian capital gains tax on the $1,000 in gains.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

The other forms of income are interest and dividends. Interest income is 100% taxable in Canada, while dividend income is eligible for a dividend tax credit in Canada. In the 46.41% tax bracket, you’ll pay $464.10 in taxes on $1,000 in interest income, and you will pay $230.60 on $1,000 in dividend income.

As Canadian capital gains tax is lower than the tax on interest and just above the tax on dividend income, capital gains is a very tax-advantaged form of income. However, since most investors have income of all three types, here are three strategies for structuring investment portfolios to minimize the tax burden.

1. It is usually best to hold any common shares outside of an RRSP (as dividend income and capital gains taxes are taxed lower than interest income), and interest-paying investments in an RRSP.

2. More speculative investments are best held outside of an RRSP. If investors hold them in an RRSP and they drop, investors not only lose money, but they can’t use the losses to offset any taxable gains from other investments.

3. Regarding mutual funds outside an RRSP, the main consideration is that mutual funds make annual capital gains distributions even if investors continue to hold the fund units. Investors then pay Canadian capital gains tax on half of any realized capital gains. So you are best to hold mutual funds in an RRSP and common stocks outside. You won’t realize capital gains on common stocks until you sell.

A properly structured investment portfolio can let you take advantage of the low tax rate on capital gains and dividend income while sheltering your higher-taxed interest income in your RRSP. If you hold dividends or capital gains in an RRSP, you gain the tax shelter of the RRSP, but when you withdraw the funds from your RRSP they are taxed at the same rate as interest income. This means you would lose out on the lower tax rates offered.

Let’s look at an example. Say you purchased 1,000 shares of TD Bank at $20 per share many years ago, and when it reaches about $40 per share, you decide to sell. Your proceeds from the sale are $40,000 ($40 per share multiplied by 1,000 shares) and your cost (the cost of purchase) is $20,000 ($20 per share multiplied by 1,000 shares). This means that your profit on the sale, also known as your capital gain, is $20,000.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

Capital gains are given favourable tax treatment in Canada. You only pay tax on 50% of the amount of your capital gain (the 50% amount is known as the capital gains inclusion rate). So, the amount of your taxable capital gain is only $10,000 ($20,000 multiplied by 50%). If your tax rate is 40%, you would only pay $4,000 in taxes ($10,000 in taxable capital gains multiplied by a 40% tax rate).

If we compare this to interest income, you can see the advantage of capital gains. Interest income is fully taxable, so that same income of $20,000 at a tax rate of 40% would cost you $8,000 ($20,000 in interest income multiplied by a 40% tax rate). That is double what you would pay on the income from a capital gain.

What is capital gains tax? Capital gains tax is a great way to plan your income to pay less taxes. All forms of income have their place in a properly planned portfolio, but by planning ahead you can minimize your overall tax burden and maximize the money you save (and the size of your investment portfolio).

For example, the 2008 deadline for tax-loss selling on the Toronto Stock Exchange was December 24, 2008. If you sold at a loss on or before that date, you could deduct your loss against your 2008 capital gains. However, you can also carry your loss back for the previous three years (2007, 2006 and 2005) to offset capital gains in Canada, or carry it forward indefinitely, to offset past or future capital gains.

If you are considering making use of tax-loss selling to minimize capital gains in Canada, you should also be aware of the “superficial loss rule.” This rule states that if an investor, their spouse or a company they control buys back a stock or mutual fund within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed.

In his new FREE special report, "Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities, " Pat McKeough shows you 7 powerful strategies that could save you thousands in taxes. And they couldn’t be easier to put into practice. Don’t miss out on this one-of-a-kind offer. Click here to claim yours now.

There are some ways to keep exposure to stocks during the 30-day period. If you decide to sell your resource shares to realize a capital loss, but then you decide that resource stocks are poised for a rebound, you can buy a resource-heavy mutual fund to keep yourself exposed to that sector. Or you could buy shares in a company that is in a similar business as the one you sold (such as selling TransCanada Corp. and buying Canadian Utilities).

It’s always a good time to sell bad stocks, or stocks that are wrong for your portfolio. But you need to balance that rule against the fact that in the final couple of months of the year, some investors dump stocks without thinking, just to cut their taxes. In some cases, they simply want to sell and be done with it. In others, they intend to buy the stock back after 30 days (as we mentioned, if you buy back any sooner, you cannot deduct your loss.)

As a result, stocks that have been weak tend to stay weak in the final month or two of the year. But the best of the bunch can put on extraordinary recoveries when tax-loss selling season ends.

Our advice: don’t let tax considerations spur you to make a costly mistake. You can always sell next year and carry your loss back.