Have an account? Please log in.
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 (49.53%), you will pay $247.65 in Canadian capital gains tax on the $1,000 in gains.
The other forms of investment 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 49.53% tax bracket, you’ll pay $495.30 in taxes on $1,000 in interest income, and you will pay $295.20 on $1,000 in dividend income.
A happy retirement
Make sure you have all you need to do everything you plan to do when you retire. Take advantage of our years of experience helping our Wealth Management clients shed their worries and enjoy the retirement they want. Follow the guidelines in our comprehensive free guide—”12 Steps to the Retirement You Want.”
Three capital-gains strategies
As Canadian capital gains tax is lower than the tax on interest and 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.
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 make 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.
Bonus Tip: Should you be selling your stocks in the first place?
Stock prices tend to move in short spurts, interrupted by lengthy periods when they mainly move sideways. For this reason, sometimes investors who only focus on price, rather than the fundamentals of their investments, may make changes just for the sake of change.
Selling stocks because you are bored with them is not the kind of mistake that brings immediate losses, but it’s sure to cut deeply into your long-term returns. The reason is that the market’s top performers can bore you to tears for months or years at a time. However, even though they may go sideways for a long time, these stocks may then set off on a big rise. If you sell out of boredom, you would miss that rise.
Use these three tips to see if you should be selling your stocks in the first place.
Note: This article was last updated on April 14, 2016.Be the first to comment
All of our articles are available for republishing as long as you provide a link back to the original article.
In today's economy, it's more important than ever to have clear investment advice that is tailored to your own personal goals. This is where Pat McKeough's conservative safe-investing philosophy comes in. Through TSI Network, you get access to reports, monthly newsletters and premium services that go beyond the daily headlines to give you all the advice and information you need to build a portfolio with long-term growth potential. Simply click on the links below to discover which service is right for you.
TSI Premium Services