Cutting your taxes through capital gains is a very smart financial planning strategy.

Did you know that Canadian capital gains taxes are actually taxed at a much lower rate than interest? This is a huge advantage to investors and can substantially cut your tax bill—if you structure your investments so that more of your income is in the form of capital gains.

Here is a quick refresher on capital gains taxes:

For example, let’s say you buy a stock for $1,000 and then sell that stock for $2,000. You then have a $1,000 capital gain (not including brokerage commissions). You would then 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 (49.53%), you will pay $247.65 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 49.53% tax bracket, you’d pay $495.30 in taxes on $1,000 in interest income, and you would pay $295.20 on $1,000 in dividend income.

3 ways to cut your capital gains taxes

1. Tax loss selling as a way to cut capital gains taxes

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 with capital gains, 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. 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 added capital gains if you sell after you retire, when you may be in a lower tax bracket.

It’s always a good time to sell bad stocks, or stocks that are wrong for your portfolio. But note 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. If you’re not in a hurry, you might want to sell before or after that time of year.

2. Tax-free saving accounts as a way to cut capital gains taxes

The federal government first made the tax free savings account (TFSA) available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free. You could contribute $5,000 in 2009 to start your tax free savings account.

As of January 1, 2013 the annual contribution limit increased to $5,500. It jumped to $10,000 for 2015. It then went back to $5,500 in 2016. That means that if you haven’t contributed yet (and were 18 years or older in 2009) you can now contribute up to $46,500.

Tax-free savings accounts let you earn investment income—including interest, dividends and capital gains—tax free. But unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible.

If funds are limited, you may need to choose between TFSA and RRSP contributions.

RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.

Moreover, investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, and then begin making taxable RRSP withdrawals.

3. Donating stocks as a way to cut capital gains taxes

Donating stocks to non-profit groups is a good way to maximize your charitable-donation and cut your capital gains taxes.

There is now a way to donate funds you hold in shares of publicly traded companies that not only maximizes the donation for the charity, but lets you pay no capital gains taxes. This change came into effect as a result of the May 2006 federal budget.

This amounts to a double benefit for investors. When you donate stocks or mutual funds directly to a charity, you get a tax credit on the entire value of the shares. Plus, any capital gains you recognize on these investments are tax free.

Let’s look at an example: say you bought 1,000 shares of Royal Bank at $20 per share, and when you decide to donate your holding, the stock has climbed to $50.

If you decide to sell the shares first and donate the proceeds to charity, your profit, or capital gain, on the sale would be $30,000.

You only pay tax on 50%, or $15,000, of your capital gain. If you live in Ontario, say, and are in the highest income-tax bracket, your tax rate would be 49.53%, so you would owe $7,430 in capital-gains tax, leaving you with a total donation of $42,570, for which you would receive a tax credit of roughly $21,085.

However, if you are in the same tax bracket and donate the shares directly, you will receive a tax credit on the entire value of the shares at the 49.53% tax rate, for a total of $24,765, and at the same time avoid paying taxes on the accumulated capital gains. And the charity would receive the entire value of the shares ($50,000).

There are many ways you cut your capital gains taxes. We recommend you talk to you tax professional or account before using any of these strategies. Share your experiences with us in the comments.