All your life, you invest and create wealth through assets like property, stocks, jewellery, your company and more. When you go to liquidate these assets for a gain, it gets added to your taxable income. If you realize this gain after retirement, it could also hamper your old age pension (OAS), which is paid depending on your annual income. How can you realize the gains of your long-term investments without giving it all to the Canada Revenue Agency (CRA) in taxes?
The key is to realize capital gains gradually over the years. The CRA also offers several tax deductions on certain types of capital assets.
Three Ways to Use Capital Losses to Reduce Capital Gains Tax
Capital losses are mainly used for investment securities, but you can use them for all capital assets. The CRA calculates tax on the net capital gain after deducting capital loss. And the capital loss can be carried back three years and forward indefinitely. You can use capital loss to reduce capital gains tax in three ways:
Tax loss harvesting
If you have an asset appreciating (accruing capital gain), you can sell your other stocks at a loss and build a pool of capital losses. When you sell that asset and realize the capital gain, you can use the harvested losses from other securities to offset the capital gain. However, be aware of the superficial loss rule, as it could deny your capital loss claim.
A superficial loss is created when you sell a stock and buy a similar stock within 30 days before or after the sale of the stock. Or you sell a stock and ask your spouse to buy it. Or you sell a stock but have the right to acquire the identical stock. The CRA views such transactions as superficial losses and could deny you the right to claim a capital loss. A tax professional could help you plan your capital transactions that are considered legitimate by the CRA.
Use accrued capital loss of a spouse
They can transfer capital gain and loss between spouses. If your spouse has unrealized losses from the past, the CRA allows you to use their capital losses to offset your capital gain. Here again, you need to be careful around the superficial loss rule. A partner can transfer shares to the other tax-free in the case of death or divorce. If Amy had given Bob 100 shares of X company at the time of the divorce, Bob would not have faced any tax unless he had sold the shares. The capital gain will be calculated from the value Amy paid to buy the shares, not when the shares were transferred to Bob. This way, Amy moved the accrued capital gain to her spouse.
Capital loss on foreign securities
If you are a Canadian resident and sold foreign investments, you must report those sales in your Canadian income tax return. When reporting the sale, you must convert the sales proceeds into Canadian dollars, which means the net return will include the return on the investment plus gain or loss in the currency exchange rate. The capital gain/loss on the exchange rate will be taxed similarly to the capital gain tax.
Two Ways to Reduce Capital Gains Tax on Sale of Business
The CRA offers some specific tax benefits to small business owners when they sell their business.
Lifetime Capital Gains Exemption
Every Canadian small business owner is eligible for a long-term capital gain exemption (LCGE), which is $1,016,836 in 2024 and is indexed to inflation. It means you can sell your business, farm or fishing property, related reserves and trusts and realize a capital gain. Capital gain up to the LCGE limit will be exempt from capital gains tax. Any gain above the limit will be subject to capital gain tax.
For instance, if John sells his business at a capital gain of $2 million, the LCGE will exempt a $1 million gain, but the remaining $1 million could attract a considerable tax bill. However, John can divide his shares and use his spouse’s LCGE limit to sell the business with limited tax liability. However, the sale has to be timed well, as the CRA has stringent eligibility criteria for this exemption.
Tax-deferred roll-over
Small businesses may get taken over by a more prominent company. In such takeovers, the owner can sell all or a portion of their shares for shares of the acquiring corporation. When you get new shares for your old ones, a rollover defers your tax when you sell them for cash. However, this rule also has an exemption. The exchange of shares of a mutual fund corporation that results in the investor switching between funds is not considered a rollover. It is deemed as a sale at fair market value for tax purposes.
Contact Black and Gill LLP in Etobicoke to Help You with Tax Planning
There are many other ways to reduce capital gains tax, such as charity donations, Registered Retirement Saving Plans and capital gain reserves. A professional tax consultant can help you prepare a comprehensive tax plan depending on your capital assets and bring significant tax savings. At Black and Gill LLP, our tax consultant can provide tax planning and filing services. To learn more about how Black and Gill LLP can provide you with the best tax planning expertise, contact us online or call us at 416-477-7681.