Canadian capital gains tax is always on the minds of investors even as they deal with market downturns
There are three main forms of investment income in Canada: interest, dividends and capital gains. The government taxes each differently. Here’s a reminder of how smart investors use their knowledge of taxation rates, especially in the case of Canadian capital gains tax.
With stocks, you only pay capital gains tax when you sell or “realize” the increase in the value of the stock over what you paid. (Note: mutual funds generally pass on their realized capital gains each year.)
How Successful Investors Get RICH
Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor.
How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
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, they will 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 (53.53%), you will pay $267.65 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 53.53% tax bracket, you’ll pay $535.30 in taxes on $1,000 in interest income; you will pay $393.40 on $1,000 in dividend income.
Canadian capital gains tax is lower than the tax on interest and on dividend income. So, 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.
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. (Still, it’s okay to hold shares in an RRSP–especially if you don’t hold any fixed-income investments.)
It’s best to hold more speculative investments 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.
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.
2. Structure your portfolio
A properly structured investment portfolio lets you take advantage of the low tax rate on capital gains and dividends. At the same time, it shelters your higher-taxed interest income in an RRSP. If you make dividends or capital gains in an RRSP, you gain the tax shelter of the RRSP. However, 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.
3. Determine whether you should 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 focused on price ignore the fundamentals quality of their investments. They then may make changes just for the sake of change.
You may not suffer losses immediately if you sell stocks because you are bored with them. But you’re 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.
Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.
Before you sell, ask yourself this: does the stock have a poor fundamental outlook? Or do you want to sell because it just isn’t going up fast enough (see boredom above)?
Avoid portfolio tinkering, especially when it comes to selling stocks you believe have risen too far and too fast. To succeed as an investor, you need a big winner in your portfolio from time to time. One key fact about big winners is that they tend to go up further and faster than most investors expect. They can keep doing that for years if not decades.
What to be aware of regarding capital gains tax in Canada
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.” It 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, they are prohibited from claiming the capital loss. Failing to obey the 30-day rule will result in the capital loss being disallowed.
For additional guidance, subscribe to The Successful Investor, our award-winning conservative investment advisory for investors interested in high-quality, mostly Canadian stocks. Those tend to surge ahead in good markets and hold their own in the face of market declines. It focuses on low-risk stocks with strong profit and growth potential, and we’d love to have you as a member.
Have concerns about paying capital gains tax encouraged you to hold onto a stock longer than you otherwise would have?
This article was originally published in 2014 and is regularly updated.
The privacy of the site/store visitor is very important to TSI Network, and is respected at all times. The information we receive from customers helps us to personalize and continually improve your online experience at TSI Network.
We do not collect or disclose personal information, except when it is provided to us voluntarily by the site/store visitor with their consent.
We store subscriber and password files containing personal information securely. These files are stored in secure areas that are not accessible to the general public. We are always working to ensure the security of your personal information.
What personal information do we collect?
The information we receive from customers helps us personalize and continually improve your online experience at TSI Network. TSI Network may collect personal information online for all legal purposes, which include, but are not limited to:
Information You Give Us: We receive and store any information you enter on our website or give us in any other way through sign-up forms or ordering forms for publications and services. You can choose not to provide certain information, but then you might not be able to take advantage of many of our services and features. We use the information that you provide for such purposes as responding to your requests, customizing your web browsing experience for you, improving our website, and communicating with you.
Automatic Information: We receive and store certain types of information whenever you interact with us. For example, like many websites, we use "cookies," and we obtain certain types of information when your web browser accesses TSI Network.
Information from Other Sources: For reasons such as improving personalization of our service (for example, providing better product recommendations or special offers that we think will interest you), we might receive information about you from other sources and add it to our account information. We also sometimes receive updated delivery and address information from our shippers or other sources so that we can correct our records and deliver your next purchase or communication more easily.
We do reserve the right, however, to collect and perform statistical analyses of the internet traffic to our website for our internal use. However, information collected does not allow us to identify any individual, and will not collect any personal information of the visitor. Furthermore, we do not sell, rent or loan to any outside parties the information collected and analyzed.
Although you may be able to access some of our websites without being required to register or provide personal information, certain websites and sections of our websites may require registration. In addition, if you choose to contact us to ask a question, we will collect your personal information so that we can respond to your question.
To make the visitor’s experience on our website easier, we may use per-session “cookies” (session identifiers) to track the state of the visitor session. This “cookie” is destroyed when your session with our website is over.
Cookies are alphanumeric identifiers that we transfer to your computer's hard drive through your web browser to enable our systems to recognize your browser and to provide features like "Remember Me" for our paying subscribers. Cookies are also used during the ordering process to help ensure your order is handled correctly. We do not extract any information about individual users or their computers as a part of this process.
The "Help" portion of the toolbar on most browsers will tell you how to prevent your browser from accepting new cookies, how to have the browser notify you when you receive a new cookie, or how to disable cookies altogether. However, cookies allow you to take full advantage of some of TSI Network's most useful features, and may be required to access certain areas of our website.
Internet Protocol (or IP) addresses are collected for all visitors to this site. This information is used for the purposes of traffic analysis.
Does TSI Network Use the Information It Receives?
"Contact Us" and Comment Features: TSI Network encourages visitors to its websites to contact us with questions and comments. Email addresses and other information of persons using these features may be collected in order to facilitate our responses to those inquiries.
Purchases of Merchandise: TSI Network websites may offer individuals the opportunity to purchase branded or other merchandise online. In connection with those purchases, customers may be asked to submit personal information, such as shipping addresses and credit card information, which is required to complete the transaction. TSI Network may also offer a Membership program, through which purchasers of its products may receive discounts on their online purchases. Membership registration may involve the submission of personal information to TSI Network and assignment of a user ID and password.
Agents: We employ other companies and individuals to perform functions on our behalf. Examples include fulfilling orders, delivering packages, sending postal mail and email, removing repetitive information from customer lists, analyzing data, providing marketing assistance, processing credit card payments and providing customer service. They have access to personal information needed to perform their functions, but may not use it for other purposes.
Promotional Offers: We may make our postal mailing list available to organizations offering products or services that might interest you. If you prefer NOT to receive these offers, please send an email with your name and address to email@example.com with "Do Not Rent Name" in the subject line. We do NOT make our email list available outside our organization.
Protection of TSI Network and Others: We release account and other personal information when we believe release is appropriate to comply with law; enforce the terms of the Legal notices that accompany this policy; or protect the rights, property or safety of TSI Network, our users or others. This includes exchanging information with other companies and organizations for fraud protection and credit risk reduction.
In addition to these limited disclosures of personal information, TSI Network may provide its affiliates or unaffiliated third parties with aggregate information about visitors to our sites. For example, we might disclose the median ages of visitors to our websites, or the numbers of visitors to our websites that come from different geographic areas. Such aggregate information will not include information of any individual visitors to our websites.
TSI Network may provide personal and other information to a purchaser or successor entity in connection with the sale of TSI Network, a subsidiary or line of business associated with TSI Network, or substantially all of the assets of TSI Network or one of its subsidiaries, affiliates or lines of business.
With Your Consent: Other than as set out above, you will receive notice when information about you might go to third parties, and you will have an opportunity to choose not to share the information.
Except as provided herein, TSI Network will not sell or rent personal information about you to unaffiliated third parties.
We may disclose personal information you have provided through our websites, for the above purposes, to persons or companies that we retain to carry out and other activities for which you have registered or in which you have otherwise asked to participate. In particular, we may for these purposes transfer information to any country (including the USA and other countries which may not offer the same level of data protection as Canada). We also will disclose personal information if required by law, including compliance with warrants, subpoenas or other legal processes.
TSI Network requires persons and companies to which it discloses personal information to restrict their use of such information to the purposes for which it has been provided by TSI Network, to adequately protect the information, and not to disclose that information to others. TSI Network cannot be responsible, however, for any damages caused by the failure of unaffiliated third parties to honour their privacy obligations to TSI Network. Similarly, TSI Network is not responsible for the privacy policies and practices of other websites that are linked to our websites.
We’re always happy to receive feedback, comments and ideas from TSI Network visitors, and we encourage you to add your perspective to any issue by leaving your comments on the site.
To make sure users get the most out of the site’s comments function, we’ve provided a few guidelines:
Do not post threatening, harassing, defamatory, or libelous material.
Do not intentionally make false or misleading statements.
Do not offer to sell or buy any product or service.
Do not post material that infringes copyright.
Do not post information that you know to be confidential or sensitive or otherwise in breach of the law.
TSI Network will not accept responsibility for information posted in the comments.
Please note that we reserve the right to delete or edit all comments. As well, we may close posts to further comments at our discretion. If a user repeatedly abuses our comment policy, we may also revoke that user’s access to our comments section.
By commenting on TSI Network, you agree that you retain all ownership rights in what you post on the site, and that you will relieve us from any and all liability that may result from those postings.
Special Note for Parents
TSI Network does not sell products for purchase by children. If you are under 18, you may use TSI Network's site only with involvement of a parent or guardian
How do we protect your personal information?
TSI Network does everything possible to prevent unauthorized intrusion to its websites and the alteration, acquisition or misuse of personal information by unauthorized persons. Notably passwords submitted by users of our websites are encrypted using encryption mechanisms. However, TSI Network cautions visitors to its websites that no network, including the Internet, is entirely secure. Accordingly, we cannot be responsible for loss, corruption or unauthorized acquisition of personal information provided to our websites, or for any damages resulting from such loss, corruption or unauthorized acquisition.
How do we maintain the integrity of your personal information?
TSI Network has procedures in place to keep your personal information accurate, complete and current for the purposes for which it is collected and used. You may review the information that you have provided to us and where appropriate you may request that it be corrected. If you wish to review your personal information please send a request to: firstname.lastname@example.org.
How do I withdraw my consent to use Personal Information? Access, Correction, Inquiries and Complaints
If you wish to request access to, or correction of, your personal information in our custody or control, or find out how we've used or disclosed that information, please make your request in writing to us. We may need to verify your identity before searching for or providing you with personal information. In some circumstances, we may not be able to provide access to your personal information, for example if it contains the personal information of other persons, if it constitutes confidential commercial information, or if it is protected by solicitor-client privilege. If we deny your request for access to, or refuse a request to correct, your personal information, we will advise you of the reasons for this refusal.
If you do not want to receive promotional offers, please notify TSI Network by sending an email to email@example.com.
The provision of information by you is entirely voluntary and you have the right not to provide information. Subject to applicable law, you may have the right to receive certain information as to whether or not personal information relating to you is held by TSI Network and to obtain a copy of such information that is sought. You may also have the right to require information, where appropriate, to be erased, blocked or made anonymous or to have data updated or corrected. If you do not wish TSI Network to hold information about you or if you wish to have access to information, modify information, or object to any processing of information or if you have questions please contact us.
What Choices Do I Have?
As discussed, you can always choose not to provide information even though it might be needed to make a purchase or to take advantage of TSI Network features.
You can add or update certain information as explained in the section "How Can I Change My Information?"
If you do not want to receive email or other mail from us, please notify TSI Network by sending an email to firstname.lastname@example.org.
Changes to this Policy
This Policy is the sole authorized statement of TSI Network's practices with respect to the collection of personal information through TSI Network's websites and the subsequent use and disclosure of such information. Any summaries of this Policy generated by third party software or otherwise (for example, in connection with the "Platform for Privacy Preferences" or "P3P") shall have no legal effect, are in no way binding upon TSI Network, shall not be relied upon in substitute for this Policy, and neither supersede nor modify this Policy.
TSI Network may revise this Policy from time to time.
Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
You are trying to access subscribers-only content. If you are already a subscriber, use the form below to log in.
Subscribers will have unlimited access to the magazine that helps people live more sustainable, self-reliant lives, with feature stories on tending the garden, managing the homestead, raising healthy livestock and more!
You are trying to access subscribers-only content. If you are already a subscriber, use the form below to log in.
Subscribers will have unlimited access to the magazine that helps the small-scale poultry enthusiast raise healthy, happy, productive flocks for eggs, meat or fun - from the countryside to the urban homestead!