Recently I got a lot of inquires asking…
“Thomas, what should I do if
I know a huge tax bill coming up?”
Maybe you sold your cottage
or your rental properties
or your let go your stocks or cypto
You are happily enjoying your profit
until you realize –
with huge capital gain also comes a hefty tax bill.
And by april,
The CRA is ready to share your profit too.
so how do you calculate the capital gain tax?
And what can we do
to keep as much of money as possible?
In this video,
I want to share 6 strategies that can
help you to offset capital gain tax
so you can save tens of thousands of dollars.
And before we start.
If this is your first here, thanks for dropping by
My name is Thomas,
This channel is to help Canadians to make better choices
On Retirement Wealth and Insurance
My goal is to make sure you take 1 or 2 ideas home
And start making better financial decisions today
If you found this video valuable,
make sure you click the subscribe button below!
Let’s get started!
Let’s first have a look at how high capital gain tax is.
In Canada, If you make any profit on an investment,
50% of the growth will be considered capital gain -
So say,
if you bought your 2nd property at $500,000
10 years ago and now you sell it at 1.5 million dollars.
1 million will become your profit,
and 50% which is 500k of that will be capital gain
and consider as your income that year.
and that pretty much pushes you to the highest
tax bracket and depends which province you are in~
you will need to pay give or take $250,000
to our Canadian government.
Paying 25% tax isn’t fun,
so let’s have a look at the 6 strategies
you can use to offset your capital gain tax.
I will first introduce the easiest way
then I will move to a more complex strategy
And as a disclaimer,
this video is for information purpose.
Whether any of the strategies fit you or not,
PLEASE talk to a tax specialist or a financial advisor.
Yes,
the first and the most effective strategy
to offset capital gain tax is simply your timing.
If you sell a property or shares,
time the sale as early as
in the calendar year as possible.
The best timing would be the first two months of
the year because then you have time
for the next 14 month until April of the next year
to figure out the tax problem
So for example,
if you sold a property or shares in January 2021,
you have time until April 2022
to figure out the whole tax situation.
But if you were to do it in December 2021,
you also have pay the tax in April 2022
- which is significantly less time.
So,
plan and time your capital gain as much as possible.
The next strategy to offset huge capital gain tax
is leveraging capital loss.
This means that
you use the loss to even out the capital gain.
Here is an example:
Let’s say in the year 2020 you earned $1,000 profit
from selling stock A in a non-registered account.
Now, usually,
you’d have to pay 50% in capital gain tax.
But let’s say in 2020
you also lost $1,000 off selling stock B
In this scenario,
the win and the lose cancel each other out
and you won’t have to pay capital gain tax.
It’s also possible to offset a part of the capital gain tax.
For example,
if you have a capital gain of $1,000 and a loss of $500.
So your profit is $500 –
and assuming you are in 50% tax bracket,
which is 250, which is a lot more feasible.
If you have a year where you only have losses,
you can carry those losses forward or backward
to apply them to different years.
Carrying it backward is possible for
up to three years to offset any gains for a tax refund,
or carry them forward indefinitely and accumulate them.
In most cases,
a capital loss can only be used to offset a capital gain.
But there are even some instances where you can
claim your capital losses against other kinds of income,
but you should consult a qualified accountant
to discuss this strategy.
Now,
one important thing to keep in mind is that in order to
properly offset capital losses it has to be a real loss.
This means you can’t just sell
and repurchase stocks within a month.
What’s more,
you also can’t sell a stock
and then tell your spouse to buy it.
Those things are considered “superficial losses”
and they aren’t suitable to offset a capital gain.
What some people do is sell investments
that have decreased in value
and then purchase a similar investment.
All in all,
capital loss is a solid strategy to reduce the tax burden.
but what if I don’t have any capital loss
in my years of investing?
Let’s have a look at strategy number 3 –
which is leveraging your RRSP.
RRSP is one of the most popular
tax shelters account in Canada.
while the investment gain
pushes your income to the next level,
RRSP can help offset it
by lowering your taxable income.
For example,
if you bought a place at 500,000 a
couple of years ago and you now sell it at 700,000.
So the capital gain will be $100,000 (profit / 2).
And if your RRSP happens to have $100,000 room,
then you can contribute that $100,000,
and your tax will be even out.
Keep in mind, however,
that once you take money out from your RRSP
you will be taxed at your full marginal rate –
because you did not pay tax on your income
when you contributed.
And the room will not be regenerated.
Still,
it’s a good strategy to distribute your capital gain.
Because instead of paying all the tax
in one calendar year.
Once you put it in RRSP and you can choose
a longer period to slowly take the money back out.
That’s why most of the time,
I recommended we should contribute to RRSP
but don’t max out your RRSP every year.
you want to save some room
for this capital gain scenario.
My suggestion is to leave 30% room
every year and carry forward.
If you want to discover more RRSP strategies
check out my other videos.
I have a whole playlist about RRSP
and I’m sure you’ll find it very valuable.
The next thing you can do to offset
capital gain tax is to do an investment loan.
Under line 22100 the carrying charge,
It’s possible to use loans to deduct interest
but there is a requirement:
Your loan must be directly involved
to produce income.
It can be interest, dividends,
rent, or business income.
There has to be a direct link between
the loan and the use of the fund.
So, for example,
you take on the loan and use it to
invest in paper assets that pay dividends.
Then it becomes tax-deductible.
There are a few things to consider:
●The money you borrowed must be used
for the purpose of earning income
from a business or property.
Property income includes interest income,
dividends, rents, and royalties.
Employment income doesn’t count towards this.
●You must pay the interest during the year
in which you are claiming the deduction.
Note that compound interest
is only deductible in the year it is actually paid.
●There must be a legal obligation
to pay the interest.
And let’s talk about a couple of things
that we need to pay attention.
Even though the interest you borrow is
100% tax-deductible and
there is no cap like the RRSP room.
But in the end,
this is still a borrow-to-invest strategy.
Meaning your returns needs to be bigger
than the cost of borrowing.
Say your interest payment is at 3%,
then you want to aim for
at least 5% return for the investment.
And depends on what loan you borrow,
it might reflect on your credit report.
I have a video about should you borrow to invest,
I will leave it the link at the top corner,
be sure to check it out!
Now strategy 1 – 4 is relatively simple
and require less capital to do it.
The following 2 ways require larger capital in order
for the math to make sense and its more risk
involve so be sure to talk to a specialist first.
Strategy number 5 to offset huge capital gain tax
is flow-through shares.
What exactly is that?
Flow Through Shares are a special issue
of common shares where the tax deductions
are issued to the original investors
and then become regular common shares
after the tax deduction is completed.
Ok. What the heck does that mean?
In a nutshell,
certain sectors in Canada like mining, oil,
and gas, or renewable energy sectors
need funding to grow and develop,
so the government wants to encourage
investors to support and in exchange
the government come up with a tax incentive
called the flow through share.
When you purchase flow-through shares,
you will receive a tax slip from the company
allowing you to claim the full purchase price
as a deduction on your year-end taxes.
Here is an example of what that could look like:
For easy numbers,
Let’s say that your annual income is $100,000.
And if you invest $10,000 in ABC mining,
you can write your income by $10,000
and now your income is $90,000
Let’s assume you are in the highest tax bracket
and your tax would be about 50%.
so you save $5,000 in tax by
lowering $10,000 of taxable income.
Similar to an RRSP in this case.
And wait! there is more,
You can then sell the shares for $10,000
assuming your investment has neither
increase nor decreased in value.
Yes
This will create another capital gain of $10k
which is taxed by 50% on half of the profit
- which is about $2,500.
So you got $5,000 back from the government,
but when you sell and pay a capital gain of $2500,
you are still net $2500 positive.
Now,
while this strategy is powerful,
but it also takes a lot of planning and
a good understanding of the flow through shares,
tax calculations, and a lot more.
Also usually the money needs to stay in
the company for at least 2 to 5 years and
worst-case scenario if the company goes bankrupt,
the money you invested will become zero.
Either you have done this before or not,
please triple check with your specialist
I am not sure if every province has this.
But I know If you are in B.C.
you can use this strategy
to offset your capital gain tax.
Can you Let me know in the comment
if your province has this too?
The small business venture capital tax credit
encourages investors to make
equity capital investments in B.C.,
in order to give small businesses access
to early-stage venture capital
to help them develop and grow.
B.C. investors receive a 30% tax credit on their
investment in a venture capital corporation (VCC)
or an eligible business corporation (EBC).
I am not going to talk about the difference
between EBC or VCC in this video.
For your information,
as long as they are recognized by the BC government,
and you can find the list in their program.
Let’s talk about the features for this strategy,
each individual can invest up to $400,000 annually
and receive a 30% refundable tax credit.
And the keyword is a tax credit,
not tax write off,
meaning you can save $120,000 of tax and
the credit can be carried forward for up to 4 years.
Sounds like a lot of money involve
and a lot of tax implication.
And it for sure does.
And according to research
50% of all small businesses fail in the first 5 years.
And again your investments can potentially go to zero.
If you really want to do this talk to a pro who can
show you the ropes as there is a lot that can go wrong.
Alright,
here are my 6 strategies to offset capital gain taxes
BUT WAIT!
I want to throw a bonus to you!
Strategy no 7. Capital Gain Reserve
This is actually recommend
by an accountant friend of mine.
He said this is a good strategy especially
if you are selling a business or a property.
If the proceeds of disposition from a
sale of capital property are not all receivable
in the year of sale,
CRA allows a taxpayer to defer
a portion of the capital gain,
within specified limits,
until the year in which the
proceeds become receivable.
For example :
When you sell a property,
you usually have to pay the tax bill in full.
However,
sometimes you receive the amount
over a number of years.
For example,
you may sell a property for $50,000 and receive
$10,000 when you sell it
and the remaining $40,000 over the next 4 years.
There are limitations and restrictions about this rule.
The calculation of the reserve is not easy.
You should consult a qualified accountant
to discuss this strategy.
If you guys want to know more in detail,
please leave a comment below,
and I will invite my accountant friend to share!
So to sum it up,
the 7 strategies you can use
to offset capital gain tax are:
Timing
Capital loss
RRSP
Investment Loans
Flow through shares
Small business venture tax credits
and as a bonus,
the Capital Gain Reserve
Some of them are more complex
than others and involve more risk.
That’s why I recommend talking to your
accountant or financial advisor ahead of time,
for better planning and save as much in tax as possible.
And please share this video to your family and friends
who just recently sell their investment
or receive a huge bonus!
Oh and don’t forget to check out this video too!
It will help with your tax planning!