Strategies to Avoid Paying Capital Gains Taxes
A successful self directed investor which has made gains during the year should strategically plan against paying capital gains taxes. Understanding the mechanics of the capital gains tax itself is very important. Following is the way capital gains tax is calculated and what my policy is to keep the share that the tax man is supposed to get.
Capital gains is the difference between the book value and the market value at the time you have disposed of an asset. For example, if you paid $10.00 per share and you purchased 1000 shares the book value would be $10,000.00. If the share value increases to $15.00 per share and you sell your 1000 share position, the (market value) or sale price is $15,000.00. Using these values, your capital gain would be the increase in value between the $10,000.00 purchase price and the sale price of $15,000.00 which is $5,000.00. The capital gain tax applies in the following manner, the first half of the gain ($2,500.00) is free of taxation and the capital gain tax is payable on the ($2,500.00) remaining half. The actual amount payable is figured according to your present income bracket for that calendar year.
Now this is how I save paying tax on the remaining $2,500.00. I immediately transfer the funds into my retirement savings plan (RSP) and defer the tax until retirement. Now I not only get to keep the full $5,000.00 but I have generated a tax deferral at tax time. I may have even generated a tax refund when filing my income tax return. Depending on how much time the funds remain in my RSP it may multiply over and over again.
There are many ways to defer paying capital gains taxes but this is just one of my strategies. Plan ahead and generate a larger RSP portfolio and pay less tax.
I would now like to invite you to visit http://www.FinancialInvestmentSecrets.com where you can receive a free course on basic self directed investment strategies. Also, please visit our home page at http://www.InvestorsGroupInternational.com
From Charles H. Mutrie of InvestorsGroupInternational.com
Capital Gains Taxes FAQ:
Question: Capital gains on property sale in Canada?
Purchased a lot 2 years ago, and recently sold it at a profit. The land was never lived on, built on, or modified in any way (not sure if that matters). Will I be subject to capital gains tax on the sale? Or will it count as ‘regular’ income for tax purposes?
Answer: Yes you will be subject to tax on the capital gain on the sale of your property. Capital gains are taxable at 50%. So for example, if you earned $50,000 on the sale of the property, you will be taxed on only $25,000.
Question: Canada CRA Individual Tax Reporting of Capital Gains?
CRA information is very unclear as to how dividend income (on purchased securities) and securities options (transactions) are supposed to be reported. My assumption is that they are ‘grouped’ under Capital Gains and reported on Schedule 3 and on Line 127. Is that correct? Or are dividends and options gains/losses reported elsewhere and taxed differently?
Answer: No dividends are considered income as they are earned by owning not selling the security. How they are reported by you depends if they are Canadian or foreign. If they are Canadian you would report on schedule 4 and claim the dividend tax credit on line 425 of schedule 1. This information would be reported on either a T5 or T3 and it would state whether they were eligible or regular dividends. Foreign dividends and foreign tax withheld would be reported as foreign income.
Stock options can be considered capital gain loss/loss if the same method is all ways used for tax purposes. If the option is exercised it is not considered a sale there for no transaction is considered to have taken place and the cost of the option would be added to your adjusted cost base or premium received would be used to lower your adjusted cost base. All capital transactions are reported on schedule 3.
Question: Can you do house flipping in Canada?
I heard that if you do not reside in the property or if you buy it and sell it within 2 years you must pay capital gains tax. This is to stop people from flipping houses as a business. Is it true? What province in Canada are better to real estate stuff? Don’t take recession factor please! I know now is bad market but I want to know about flipping houses in Canada.
Answer: There is no market for flipping in this economy. For flips to work buyer demand must be very high and selling prices must be on a rapid increase. Flipping might not be economically feasible again for many years if ever
The RECESSION factor is CRITICAL – if there is lower demand for houses, you could be waiting many months to sell, and you have to be making mortgage payments and property tax payments while getting no rental income from the property – you could wind up losing money on the deal if you EVER sell it – you could buy a house, put $10,000 of work into it and still not be able to sell it for even a $10,000 increase – and you would actually have to sell it for more just to cover your sales commission costs also and every month that goes by that the house isn’t sold is another mortgage payment YOU have to pay and that much profit is now gone for good – the average house is taking 7 months to sell, down from 11 months.
Flippers only ever make money if they can buy, renovate and sell within 30-60 days and that is totally unrealistic anymore
Question: If you turn your principal residence to an income property, how do you calculate capital gains tax in Canada?
If I’m moving to a new principal residence and want to keep my current condo as an income property and eventually sell the income property, does the capital gains tax get calculated from when I bought the place or when it became an income property?
Answer: The Capital Gain tax would be calculated from the date of the change of usage. You need to get the Condo appraised as at the date you have changed it’s usage. This year on your Tax return you could show the Deemed disposition of your Condo (Tax Free as it was your Principal Residence). The Deemed selling price (appraisal value), becomes the ACB (Adjusted Cost Base) of the rental property. When you sell the Condo you use that value.
Question: How much is capital gains tax in Canada, BC for properties?
I have an investment property I am selling in Vancouver, BC, Canada (also where I live). I am selling it for approximately $450,000 and making approximately $100,000 profit. How much capital gains tax do I have to pay? Is it on the profit, or total amount? Do I have to pay it at the end of the tax year, or on sale of the property? Any further information anyone can provide will be useful, as I have never sold property in Canada. I am a new (18 months) permanent resident of Canada.
Answer: 50% of the $100,000 profit is taxable as income on your tax return, and how much tax you pay will depend on your tax bracket or marginal tax rate if you have other income in the year. The tax is payable upon filing your tax return of the year (12 months ending Dec 31 for individuals), with filing deadline being Apr 30 of the following year.
Question: In CANADA, if inheriting your parent’s primary residence, do you pay capital gains tax on it? If so, how much?
Can a home pass from parent to child in Canada without tax being paid? If there is tax, who pays it? When do they pay it? And how much is it? I know that if the owner sells their primary residence they are not taxed on it. But what about when the child inherits it?
Answer: Their estate pays any taxes (including capital gains) due, but there are no taxes due on a principal residence. Hence, no tax.
Now, if it becomes YOUR principle residence, you will also have no tax owing when you eventually sell it. If you do NOT take it as your residence, you will pay tax on an increase in value from their date of death to date of sale. If you’re not going to use it as a principle residence, you should have an appraisal done on it as if the date of death, and keep it for future reference.
Question: Capital Gains Tax in Canada?
My mother owns two homes. She lives in one and recently gave away the other house to her grand daughter. Is capital gains owed on the second house?
Answer: Yes, she is taxable for a capital gain on the transfer of the 2nd house, deemed sold at fair market value on day of transfer even though it was a gift without monetary consideration. The reason is that the house she lives in is her principal residence – one per taxpayer – and is tax free upon disposition, and the 2nd house is a taxable property upon disposition.
Hope her grand daughter uses that house as a principal residence. Otherwise, her cost base that house is zero, which will trigger a huge capital gain at a later day.
Question: Please explain capital gains tax in Canada on stocks?
Also, if possible I’m trying to figure out how tax works on interested accumulated from money sitting in my bank account?
Answer: Capital Gains on stocks: If you hold individual stocks (not in a mutual fund) you must keep track of your own ACB (price you bought it for) and you r own sale price (price when you sold it) It will appear in a summary on your broker’s annual statement. You don’t need to pay capital gains until you actually sell the stock (unless we are talking stock options- but we aren’t).
When you do sell, the difference in price is the capital gain. You will pay tax at your marginal tax rate (rate for your last dollar of income earned in the year) on HALF of this gain. So, if you had a marginal tax rate of 25% (we wish!), and your capital gain was $100, you would pay 25% tax on HALF the capital gain, so you overall that is $12.50 of income tax due on a $100 capital gain.
For interest income, it simply 100% taxable at your marginal tax rate in the YEAR IT IS EARNED, not when you sell it. So, with same example above, $100 of interest will result in you paying $25.00 in income tax. Very compelling reason to invest in stocks isn’t it?
Of course if you put it in an RRSP the tax angle becomes moot. FYI: RRSP withdrawals are 100% taxable (like interest) regardless of whether the income earned in the RRSP was capital gains or otherwise.