Are capital gains taxable income? Yes, but only when you sell or “realize” an increased stock value that is higher than what you originally paid

Are capital gains taxable income? Understanding capital gains taxes and how they affect your own personal tax liability is a key part of investment planning.

When you sell a stock, you must pay capital gains tax if you’ve made a profit on the sale. The exception is if the stock is in a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), or Tax Free Savings Account (TFSA).

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Are capital gains taxable income? Yes, but there are ways to cut your capital gains taxes, like tax-loss harvesting and donating stocks

Tax-loss harvesting and selling: Decades ago, when interest rates were much higher, tax-loss selling made more financial sense. Back then, if you cut your capital-gains tax by selling losers, you could use the extra cash to generate safe returns of 5% to 8% or more. Now, safe returns are under 2%.

If you sell a losing stock, the best tax recovery you can make is (about) 25% of your loss, minus commissions. That’s because the tax benefit of selling is to cut your taxable capital gains by the amount of your “nailed-down” or realized capital losses. Capital gains are taxed at half the marginal rate that you pay on ordinary income. The top tax rate on ordinary income is now 50%, so the top capital gains tax rate is 25% of your gross gain.

On the other hand, if the stock goes back up to what you paid, you recover 100% of your loss. Better yet, this gain is tax free, since it only gets you back to where you started.

If you consider 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.

Donating stocks: 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.

Are capital gains taxable income? 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. That makes for a total donation value of $50,000.

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 ($50,000 – $7,430). For that donation 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).

Are capital gains taxable income? Remember to claim all of your deductions against taxable capital gains

Commissions and brokers’ fees aren’t the only expenses you can deduct when you sell your capital property. You can deduct many other outlays and expenses that you incur to sell your property, including fixing-up expenses, finders’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs. To ensure that you’re claiming all of the deductions you can, and are doing so correctly, we advise that you consult a knowledgeable tax professional.

For your overall investing strategy, follow TSI Network’s three-part Successful Investor strategy:

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What are your thoughts on taxing capital gains at the same rate as earned income?

What steps do you take to lower your tax liability on capital gains?