How to Avoid Capital Gains Tax in Canada

By Remitbee - Apr 26, 2022

Avoiding income tax in Canada is a criminal offence. However, if you are wondering how to prevent taxes on capital gains in Canada, you should be aware that there are several strategies you can use to lower the amount of taxes you owe to the government.

Here's how you can avoid paying capital gains tax in Canada using one of the following strategies:

Make the first step by depositing your profits into an account not subject to tax.

Essentially, tax shelters operate as a protective barrier for your investments. You can continue to grow your assets as long as they remain in a tax haven, avoiding further taxation. If you own stocks, you have the freedom to buy and sell them whenever you want without worrying about the tax consequences.

As a result of this rule, you cannot deduct capital losses from your taxable income. Canadians are well-known for using Registered Retirement Savings Plans (RRSPs). A profit earned in an RRSP, TSFA or similar accounts is not subject to taxation at the profit's realization.

Use capital gains to offset capital losses in certain circumstances.

It doesn't matter whether you make a $1,000 profit on ABC stock one year and lose $1,000 on XYZ stock the following year; your net profit is zero because the gains and losses are the same. Capital gains tax is not due in this scenario. It is possible to make a $1,000 profit while also losing $500. Your net gain after deducting the loss is $500, of which $250 must be taxed at your marginal tax rate, for a total gain of $1,000.

It would be best to offset capital losses completely, and you must experience a loss of income. Sell an asset first before you can repurchase it. A stock cannot be sold while encouraging your spouse to purchase it. Under the CRA, It is not permitted to incur a "superficial loss."

Tax-loss harvesting is another way to reduce your tax bill. You can carry over losses from one tax year to the next using this strategy to help offset future profits. Tax-loss harvesting only applies if your losses in a particular year surpass your total gains.

Defer capital gains.

A spouse or parent's death or divorce are the only circumstances in which you can defer capital gains tax on shares. If your husband purchased 100 shares of ABC stock and transferred them to you after the divorce, neither you nor your husband would be required to pay capital gains tax.

If you sell the shares, you have to pay capital gains tax. When calculating your profit or loss, the value when your spouse or parent acquired the items is used, not the value they handed them to you.

Use the capital gains exemption that applies to you for the rest of your life.

If a small business owner sells qualified private equity shares, farms, fishing equipment, or other qualifying property, they may be eligible for the lifetime capital gains exemption. Qualification securities are shares of a Canadian corporation, with most of its shareholders being Canadian.

For the taxpayer or family to be able to sell their investments, they must have held them for a minimum of 24 months. A total of $913,630 in exemption will be available in 2022. It is recommended that you consult with a tax professional due to the complexity of the laws. The capital gains exemption for equities is not available for a lifetime.

The next step is to make a charitable donation of your stock.

Perhaps, instead of giving money to charity, you could donate your stock instead. In addition to saving money, it is a cost-effective way to do good. Furthermore, not only is the "profit" from the shares deemed to be zero, but you also receive a tax credit for donating the shares, which is based on the market value of the assets at the period of donation.

Lastly, utilize the capital gain reserve.

Profits from capital asset sales can be spread over five years. Canada's progressive income tax system means that every dollar earned above our basic needs is taxed more heavily.

Consider the following: Selling a capital asset to your children leads to a $250,000 profit. Ontario's marginal tax rate is 43.41 percent. The marginal tax rate reduces to 20.05 percent if you spread the gain over five years, earning $50,000 per year.

Because this compels the buyer to pay you over time, there is a danger that they will not honour their pledge. When giving a farm to your children or grandkids, you can delay capital gains for up to ten years, minimizing your tax bill.

Sure, making money is excellent. However, understanding these strategies regarding how to reduce capital gains tax on stocks will be a more excellent step to keeping your wealth!

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