Cutting your capital gains tax bill with these taxable capital gains strategies will help you retain more of your money

Did you know that Canadian capital gains 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.

Below we share taxable capital gains strategies for getting the most from your investments.

Tax-free saving accounts as a way to cut taxable capital gains

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.

Tax loss selling as a way to cut taxable capital gains

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.

Making an adult child co-owner of your home can have hidden taxable capital gains consequences

If you have capital gains on your portfolio, you are only liable for capital gains taxes when you sell. But if you put your son or daughter on as a co-owner, the Canada Revenue Agency could interpret that as a “deemed disposition” —the sale, in other words—of half the portfolio. That would leave you liable for capital gains tax this year, rather than deferring those gains until you sell or die.

When you die, you are deemed to have disposed of or sold your entire portfolio. But no matter how old you are, that day can still be years in the future. It’s a waste to pay capital gains tax any sooner than you have to. Worse, your stocks may have gone down by the time you die. The gain on which you’ve already paid taxes may have evaporated!

You won’t have this exact problem if you put an adult child on as co-owner of your home, since capital gains on your principal residence are tax-exempt. But each of us can only have one principal-residence capital-gains-tax exemption. If your adult child already owns a home, then any gains he or she makes on your home, after becoming joint owner, will be taxable.

In this case, putting your adult child on as co-owner of your home could convert some tax-free capital gains (in your hands) into taxable capital gains (in your child’s hands).

Make sure you 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 doing so correctly, we advise that you consult a knowledgeable tax professional.

What taxable capital gains strategies do you use? Share your thoughts with us in the comments.