Considerations to Reduce or Avoid the Capital Gains Tax

In Canada, capital gains are taxed when you sell an investment or property for more than its purchase price. However, there are several strategies to reduce or avoid capital gains tax. Here’s how you can manage it:

1. Principal Residence Exemption

• Exemption for Your Primary Home: When you sell your principal residence, the capital gain is exempt from taxation. This exemption applies to the home you designate as your primary residence for each year you’ve owned it.
• Strategies:
  • If you own multiple properties (like a cottage and a home), designate the one with the highest appreciation as your principal residence, since only one property can be exempt at a time.

2. Utilize the Capital Gains Deduction for Small Business Shares

• If you sell qualified small business corporation (QSBC) shares, you may be eligible for the Lifetime Capital Gains Exemption (LCGE).
• This exemption can also apply to gains from selling qualified farm or fishing property.

3. Tax-Loss Harvesting

• If you have investments that have decreased in value, you can sell them to trigger a capital loss, which can offset your capital gains. This process is known as tax-loss harvesting.
• Carry Back or Forward: If your capital losses exceed your gains, you can carry back the losses to offset gains in the previous three years or carry them forward indefinitely to reduce future capital gains.

4. Defer Capital Gains (Timing of Sale)

• You can control when you realize a capital gain by delaying the sale of an asset to a year when your income might be lower, thereby reducing the capital gains tax rate you would be subjected to.
• Installment Sale: If you sell a large asset, you may be able to spread out the capital gain over several years by structuring the sale as an installment sale, reducing the taxable gain in any one year.

5. Gifting to a Spouse

• You can transfer assets to your spouse or common-law partner without triggering an immediate capital gain. However, if your spouse later sells the asset, the capital gain will be taxed to you unless you elect to use spousal rollover rules.
• This can be advantageous if your spouse is in a lower tax bracket.

6. Donate Appreciated Securities to Charity

• If you donate publicly traded securities (stocks, mutual funds, etc.) that have appreciated in value directly to a registered charity, you avoid paying capital gains tax on the appreciation. Plus, you get a charitable donation tax credit based on the fair market value of the security at the time of donation.

7. Use Tax-Advantaged Accounts

• Tax-Free Savings Account (TFSA): Any gains from investments held within a TFSA are completely tax-free. You won’t pay capital gains tax on the sale of investments inside the account.
• Registered Retirement Savings Plan (RRSP): Capital gains from investments in an RRSP are deferred until withdrawal, at which point the funds are taxed as ordinary income, potentially at a lower rate if withdrawn in retirement.

8. Capital Dividend Account (for Corporations)

• If you hold investments through a corporation, you can receive tax-free capital dividends from the capital dividend account (CDA), which is funded by the non-taxable portion of capital gains realized by the corporation.

9. Gains That are Taxable

• The proportion of capital gains that are taxable increased from one-half to two-thirds, starting June 25, 2024. The new rate applies to net capital gains exceeding $250,000 per year for individuals and to all net gains realized by corporations and most types of trusts

By employing some of these strategies, you can effectively reduce or eliminate the capital gains tax you owe. It’s a good idea to contact our office to tailor these strategies to your specific situation.