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How Investing Taxes Work (Part 1 – Capital Gains)





With tax season right around the corner, I figure this is a good time to start posting some tax related articles. Are you curious about how investing taxes are calculated? Specifically, capital gains tax? If so, you have come to right blog! I am by no means a tax expert but I do have enough knowledge to give general guidelines on how you can figure out your own investment taxation. Note that these tax guidelines described in this post are for Canada only. On top of that, you should consult a tax professional before applying anything you read on my blog and the web in general. :)

Lets start with RRSP’s. As you probably know, RRSP contributions and investment growth are taxable only upon withdrawal. At that point, the withdrawals are taxed as income at your marginal tax rate at the time. That’s the strategy behind RRSP’s: contribute, let it grow tax free, and withdraw when you are in a lower tax bracket (hopefully).

Now on to Non-registered accounts. There are 3 types of taxes that you need to consider.

  1. Capital Gains tax (preferred)
  2. Dividend Tax (preferred)
  3. Interest tax (keep in RRSP)

Capital Gains (CG) Tax

When you profit from selling a stock in a non-registered account, you will be subject to capital gains (CG) tax. What are capital gains? Capital gain is the difference between the selling price and buying price of a stock less the commission. For example, if you sold a stock for $1000 (inc selling fee) and paid $800 (inc buying fee), you would have a capital gains of $200. Capital gains tax are subject to a 50% inclusion rate. This means that 50% of your profit will be included as income. So in our above example, $100 would be added to your income and taxed at your marginal rate. Or another way to look at it is that any profits from a stock sale in a non-reg account are taxed at HALF your marginal rate.

The 50% inclusion rate is a reason why most financial gurus suggest that you keep investments for the purposes of capital appreciation/gain outside of your RRSP. If you keep your capital appreciation/gain assts inside an RRSP, you will be taxed on 100% of the gain because all income withdrawn from an RRSP is taxed at your marginal rate.

Another advantage of keeping your capital appreciating stocks outside of an RRSP is because you can claim your losses against your gains to reduce your taxes payable. Whereas within an RRSP, losses cannot be claimed. For example, if in 2006 you sold stock for a $4000 non-reg portfolio profit and $1000 in losses, your total profit is now $3000. To figure out your taxes payable, it would be: $3000 x 0.50 = $1500. This $1500 would be added to your taxable income for that year and taxed at your marginal rate.

This is why you’ll read some tax strategies to sell your losing stocks at the end of the year. The losing amount will be deducted from your total winning amount and reduce your overall taxes. What if you have a loser for the year, but you believe it’s a long term winner? You’re probably thinking to sell it before the end of the year and purchase it again. Not so fast, you have to make sure you don’t violate the superficial loss rule.

What is the superficial loss rule?

According to: http://www.cabusinessadvisor.com/Tax/TaxTraps/SuperFL.htm

This rule applies where a person or affiliated person acquires or had the right to acquire the same or identical property within 30 days after the disposition or 30 days before the disposition of the property in question. The disposition could have been made to anyone. In these cases, the loss on the disposition is denied and the amount of the loss is added to the cost of the substituted property.

In layman’s terms, it simply means that if you sell a stock at a loss, you can’t repurchase the shares back again within 30 days and claim the loss against your gains. However, if you do repurchase the same shares back within 30 days and you profit from it in the future, you can deduct the initial loss against your gain of THAT stock.

For example:

  • Purchase 10 ABC stock for a total cost of $1000
  • Sell 10 ABC stock for: $800
  • Loss: $200
  • Repurchase 10 ABC stock within 30 days for: $850
  • Sell 10 ABC stock in the future for $1200:
  • Profit: $1200-$850-200(initial loss) = $150
  • Taxable Amount: $75 ($150 *50%)

As a side note, you should consider the superficial loss rule if you are attempting the Smith Manoeuvre (SM). The SM suggests to sell your non-reg stock to pay down your house, then REPURCHASE the stocks. If you sell stock at a loss, you should wait 30 days before repurchasing. Otherwise, the loss will be omitted.

In summary:

  • Capital gains are taxed at 50% of your marginal rate (efficient).
  • Keep your capital appreciating stocks/mutual funds outside of your RRSP.
  • If you trade often, sell your losers at the end of the year to reduce your profits for the year.
  • Take heed of the superficial loss rule.

Taxes can be boring but they are an essential component to financial planning. In the next article (Part 2), we’ll discuss the other 2 types of investment taxes, dividend and interest income tax.

If you have anything to add to this article, please post them in the comments.





140 Comments, Comment or Ping

  1. 1. Ryan

    Thanks for the explanation. I have never fully understood how capital gains worked until just now. Look forward to the dividend and interest income tax entries :)

  2. 2. Steve

    “The 50% inclusion rate is a reason why most financial gurus suggest that you keep investments for the purposes of capital appreciation/gain outside of your RRSP.”

    Are you suggesting that people should only use RRSP room for interest paying bonds, and securities that are held for their ability to pay dividends? It seems to limit the amount of RRSP room one should use since the majority of people’s portfolios are usually in equities that they hope to appreciate in value. What is your approach to the distribution of asset classes between your registered and non-registered accounts?

  3. Hi Steve,

    According to the literature that i’ve read from financial guru’s/advisors, it is recommended that you keep all dividends and capital gains OUTSIDE of your registered account. The reason being is that if you keep capital appreciating and dividend paying assets inside an RRSP, you miss out on the tax credits AND you end up paying 100% tax on your gains upon withdrawal.

    When you retire, would you prefer to have a HUGE RRSP? Or a HUGE non-registered portfolio? I would pick the non-reg portfolio due to the tax advantages.

    Now mind you, I still keep some dividend paying stocks within my RRSP b/c it’s something to spend my RRSP money on. Another perk is that I don’t need to keep track of my adjusted cost base on re invested dividends if I do decide to sell. But for efficiency sake, with the new enhanced dividend tax credit, I believe the studies show that dividends outside an RRSP is more efficient. However, you’ll have to do your own due diligence to confirm.

    One more thing, only Canadian public companies are eligible for the enhanced dividend tax credit (as you’ll see in part 2). Foreign dividends are 100% taxed, so they belong within an RRSP.

    Hope this answers your question.

    FT

  4. 4. Steve

    Thanks for the reply,

    I see what you are saying. Perhaps we can say that “in general” RRSPs are a good place for interest paying bonds and foreign securities. And non-registered accounts are better for Canadian securities.

    But how about appreciation of foreign securities? Are they taxed at 100% or 50%? If capital gains on foreign investments are also taxed at 50% it may still make sense to keep them in a non-registered account as well.

    Steve

  5. Hey Steve,
    Yes, interest and foreign income should definitely be kept in registered accounts due to high taxation.

    I’ve only invested as far as the United States. Any capital appreciation realized in the US market are also subject to capital gains tax (50%).

    It’s only a matter of time before the govt reduces the capital gains inclusion rate and increases the dividend tax credit again. When that happens, people are going to wish that they had a bigger non-reg portfolio. Of course, that is just my opinion. :)

    FT

  6. excellent article FT! thanks for the related comments on my site

  7. 8. Dom

    FT,

    Thanks for this great article. Could you explain how profits from stock options are taxed? Is there a different tax-treatment-wise for stock options granted by employer from options purchased on the open market? I am concerned that the latter may be taxed as income as opposed to capital gain since they tend to be short-term in nature.

  8. Hey Dom,

    To be completely honest with you, I’m not 100% sure how EMPLOYEE stock options are taxed. Here is an article that includes an example that may help you:
    http://www.grantthornton.ca/taxtips/taxtips_template.asp?TipID=92

    FT

  9. 11. Ken

    Was wondering when one becomes a day trader or just an investor, when it comes to claiming capital gains or income. I have moved from a few trades a year to more than 100 and someone mentioned to me that I had to report it as income,instead of capital gains.

  10. Hi Ken: The line between trader/investor is grey. According to tax experts, it depends on your “intent” of your stock trading. I think the CRA also looks @ your personal situation. For example, if you already have a full time job, then it’s more than likely that you won’t be considered a trader.

    Also note that if you are deemed a trader, your trading will be considered a business where you’ll be able to deduct 100% of your losses and your trading expenses (home office etc).

    Hope this helps,
    FT

  11. 19. chris

    Hi!This is my first entry.I have in the process of purchasing a condo in Panama.Our principle residence will remain in Canada so I was wondering what capital gains would be in place if I sold this condo and if I should register it under a business name.

  12. 20. Michael

    Thanks very much for the clear explanation.
    I wonder if you could answer me three questions:

    1, do i need to report the realized short-term profit (but still kept in the non-reg account) even though the amount is NOT cashed out?
    for example, in year 2005, an initial investment is $1000, and the short-term realized profit is $200, no loss. However, i did not cash out any. Am i required to report the $200 profit?

    2, is that true to say the taxes will apply only if i cash out any money from the non-reg account??

    3, if one day down the road, i closed my non-reg account and cash out everything, will the taxes only apply towards the NET profit or entire cashed out amount?

    thanks very much

  13. 21. Bryce

    If you sold the security/stock/etf then you did “cash out” it doesn’t matter if the money is still just sitting in the account.

  14. Hey Michael,

    1. Yes, whenever you sell in your non-reg account, you need to report it. Selling is the same as cashing out.

    2. No, this is not true.

    3. Capital gains taxes apply to your profits.

  15. 23. Michael

    thanks very much for the reply.
    i wonder what i should do if i did not report previous years’ capital gains due to the misinformation. Will there a penalty? what shall i do?

    thanks very much

  16. Michael, you’ll have to consult with an accountant about previous years.

  17. I have built a business (Canadian Corp) and wish to sell. I will have huge capital gains even if I sell shares and not assets. Very good Cash Flow business, so perfect for another company to amalgomate. Still Capital TAx will be huge. I have 2 children and wife. I am thinkihg about gifting to children. Apon my death my younger wife will get my asset roll over tax free I think. I also own another small company (Canadian Corporate) also, and would like to buy or invest in that to keep down the Capital Tax. I have worked my butt off for 38 years and now hate to pay so much after a life time of huge tax each year.(and corporate tax too each year)
    Any comments?

  18. 28. Ken Thomas

    Hi FT,
    I am an american citizen and have invested in the Canadian real estate market. I am selling my “assignment” on a condo currently being constructed. As a foreign invester, how would I be tax? The same as a canadian citizen? I greatly appreciate your inpu,
    Ken Thomas
    Palm Springs, California US

  19. 30. Jared

    Does anyone know how selling covered call options are taxed? It is just considered capital gains, or can you just use the value to lower the adjsuted cost base of the stock that you have and pay the tax when you sell the actual stock?

  20. 31. Dom

    Great question, Jared.

    I also wonder about this question, and I would like to know if using covered calls would nullify the tax benefits of a “Smith Maneouvre” strategy (i.e. if i borrow money to invest in a stock AND writing covered calls on them, is my debt’s interest still tax deductible?)

  21. 32. chris

    My wife and I are in the process of purchasing property in Panama.We plan to live in Canada for 6 MTHS and there for 6 MTHS.How would capital gains work if we sold that property or bought another as an investment and sold it?Should we register it in our names or form a company for this purchase.Cheers! Hope someone can help me!Chris

  22. 33. fred fownes

    In the year 2007 i sold “ABC” stocks 3 times. I have been buying this stock for 6 or 7 years. How does one know what profit (gain) was made ? Saying it is the difference between what you paid for it and what you sold it for is AN OVERSIMPLIFICATION ?? I can’t be the only investor who has this problem
    Thanks,
    F Fownes

  23. Fred, you’ll need to go back into your records and calculate your total purchase Adjusted Cost Base (ACB) for the stock. From there, you’ll be able to determine the profit from your sale prices.

  24. 35. tomw

    You can do the capital gains tracking in a stock tracker or capital gains software tracker on your computer. “Stox” on Mac OS X is the best option, there are many other excellent software applications for Windows PC’s that track stocks (just enter in every transaction) and you will get a running total of your capital gains and losses.
    I’m sure the PC folks here can mention their favourite Capital gains stock tracking software.
    (you still have to manually enter in every buy and sell transaction)

  25. 36. Jason Mathew

    Hi !! This is a very good and informative post about taxes in canada, I liked it, but can you provide information on taxes in UK. It would be quiet a help.
    thanks
    Jason

  26. 37. Nathan

    I am considering buying property in the US, being that prices are quite attractive, and was wondering if anyone is familiar with taxation associated with Canadians buying property in the US. If I do decide to buy property now and sell when the property has appreciated again, how and where will I have to pay capital gains taxes? Would it be more beneficial to pay in the US or in Canada? I heard that you just pay taxes in one country as per NAFTA…

  27. 38. XGW

    Hi,

    How to calculate the capital gain/loss if I sell a portion of the stock ?

    Say, purchased 10 ABC stocks for a total cost of $1000
    and sold 5 ABC stocks for $600, capital gain would be $100 ?

    I would appreciate your reply.

    XGW

  28. XGW, it depends on your adjusted cost base on the stock. In your case, your 10 stocks had a cost base of $100 each. Since you sold 5 of those shares at a cost base of $500, your capital gain would be $100 as you indicated. I have an article on ACB coming soon.

  29. 40. Ann

    If I purchase $1000 in stocks and at the end of the year they are worth $1200 but I don’t cash them out, I keep the stock. Do I have to claim the $200 in my taxes as an income for that year and pay taxes on it. Or do I only report it on my taxes when I actually sell the stock down the road and have still made a profit?

  30. Ann, you only report capital gains when you sell.

  31. 42. Dawn

    I’ve been investing since last July – I have both capital gains and losses in my non-registered account for 2007. I had about 30 trades. I was unemployed for the past 5 years, so zero income for 2007.

    I have a few questions, hope someone can help me with this – its all very confusing to me:

    1) Can I claim my trading expense cost for buying and selling those stocks for 2007.
    2) I lost money converting Cdn$ to US$ to buy stocks and also converting it back to Cdn$ – can I claim this loss?
    3) Where on the 2007 tax form do I put my capital gain
    its not employment income? What line #?
    4) where do I find out my tax bracket for the capital gain? any website?
    5) What would be the amount I put as capital gain on the Tax Form – is it the total before losses and expenses or after?

    For e.g lets say my capital gain was 20,000 and my losses were 8,000 = 12,000

    My trading expenses, let say = 1,000
    My currency conversion loss = 1,000

    Will it be 12,000 – 2,000 = 10,000 x .50% = 5,000 I would put on the taxation form as capital gain?

    6) Does my partner put my capital gain on his return as my income even though I wasn’t employed?

    I would really appreciate your help with this – I dont have an accountant and the end of April is fast approaching. Thanks in advance.

  32. Dawn, your questions would require someone who is qualified to answer. A quick a dirty way to get an answer is to fill out your tax information via an online program and they will step you through what information to put where. Both ufile and quick tax are popular.

    However, I can give you some pointers (note that i’m not a tax pro).

    • trading costs can be claimed.
    • forex losses can be claimed.
    • to find your tax bracket, you add up your capital gain and multiply by 50%. That number will be added to your income for that year.
    • with regards to “who” claims the gain, it needs to be consistent to previous years. another thought is that if you are unemployed, the money needs to come from “somewhere”. I would think that your husband would need to claim the gains if he is the one funding the investment account. Not unless he loaned you the money. This issue should really be answered by a tax pro.
  33. 44. Dawn

    Frugaltrader,

    Thanks very much for your response, and for the online and pointer information.

    p.s I have been using my savings,line of credit and existing stocks to fund my trading activities. I’ll claim the interest incurred on my line of credit even though it wasn’t designated for trading.

    Thanks again.

  34. 45. Dawn

    FrugalTrader,

    Thanks very much for your response and for the information on the online programs and pointers.

    p.s I used my savings, existing stocks and line of credit to fund my trading actitivies – I’m planning on claiming the interest incurred on the line of credit for the year.

    Thanks again

  35. 46. James

    One thing to consider when investing in your RRSP. As you say capital gains are taxed at 100% of your marginal rate inside your RRSP but if I invested in lets say microsoft 25 years ago my $5000 investment is now worth millions of $ while my interest bearing long bond is worth maybe $13000. I can pay the tax and still have nearly a 1000 times more money than I would if I invested in the long bond. I know MSFT is not exactly typical of the average equity return but I hope you get my point.

    Jim

  36. What if you invested in MSFT OUTSIDE your RRSP? Then you would get all the appreciation, but only get taxed 50% on the profits instead of 100%.

  37. 48. James

    I would probably invest in MSFT outside of my RRSP and inside my RRSP.However since we are at the end of a grand super cycle degree advance in stock prices (yes im an elliott wave guy) I wouldnt being investing too heavily in equities for the long term. BTW we are going to have one more counter trend reversal which should take us us to 2550 on the NASDAQ before the final move down.

    James

  38. ===
    My wife and I are in the process of purchasing property in Panama.We plan to live in Canada for 6 MTHS and there for 6 MTHS.How would capital gains work if we sold that property or bought another as an investment and sold it?Should we register it in our names or form a company for this purchase.Cheers! Hope someone can help me!Chris
    ===

    If it is on a company name you only have to pay taxes when you take the money out from your company but your company may have to pay taxes too depending where it will by registered (Canada or Panama).

  39. 51. Terrie

    I know someone who has plenty of stocks, but plenty of debt, too. Is there any way they can use some of the stocks to pay down some debt without incurring lots of capital gains? The only think I can think of (I am definitely not too financial savvy) is to transfer some of the stock into RRSPs (max out their contribution room). Would they get a big tax refund they can then use to pay down some debt? Any advice?

    Terrie

  40. Terrie,The problem with transferring your non-reg stock to your RRSP is that they are deemed sold at that price, which means that you will be faced with a capital gains tax providing that there is a profit. In addition, if there is a LOSS during that time, the loss cannot be claimed against any gains.

    I would suggest that your friend stop all portfolio contributions and put all excess cash flow, savings and dividends received towards debt. If the interest on his debt is high, like credit card debt, it may be worth his while to take the tax hit from selling stock and paying down the bill.

    FT

  41. 53. Denys

    What a nice site is this!
    I was investing in Mutual Funds all the way and the information here (about CG, Dividends and online brokers) gives me the idea that the ONLY proper way to invest money OUTSIDE of RRSP would be in Stocks and ETFs.
    I have some questions here:
    1. Am I right that with Mutual Funds there are no tax breaks? Like if I invested $1000 and then received $1200 from it, then I pay a tax on $200 while if I do same thing via ETF, I pay it only from half of that amount (being $100)?
    2. What about fees paid to broker companies ($5-$10 per transaction)? Is it tax deductible as investment expenses?
    3. If my wife has no other income and some investments are on her name – she does not pay any taxes on investment income (when it’s below $9k p.a.), however this reduces my tax credit and effectively increases my taxes for something like 10-20% of the amount. Is there any benefit in this case with capital gains vs. interest income?

    Thank you very much, FT!

  42. Hi Denys, thanks for the kind feedback.

    1. capital gains with mutual funds are treated the same as capital gains with ETF’s. So in your example, tax would be paid on $100 at your marginal tax rate (mtr).

    2. Commissions on each transaction are used to increase the adjusted cost base.

    3. I would need to run the numbers, but something to consider is that only half the of the capital gains is added to income thus much more efficient than interest income.

    Hope this helps!
    FT

  43. 55. Chuck

    Denys:

    For Question #3 You might also want at having your wife invest in Dividend paying stocks. As long as the company is Canadian and its an “eligable” dividend (CRA’s rules) there are tax advantages. A person could earn about $25k in eligable dividend income and not pay any taxes on it.

    You’d also have the potential that the stocks could appreciate.

  44. 56. Ken

    I have a Corporation which owns a Rental Real Property.The Corporation does not do any other business(it is a shell company).This property is now sold (to close in sept this year) for a potential profit of approx 40K.
    This I believe will classify as Capital gains. My question is
    a) Is all of this taxable or 50% is taxable
    b) How to minimise taxes arising from this sale

    thanks
    Ken

  45. 58. James

    BTW my call on April 14th (the stock market is at the end of a grand super cycle advance and I wouldnt be investing for the long term) appears to be right on the money. Your welcome.

  46. 59. Dudley Brown

    My wife is a dual citizen. We have a small home in her country of origin and want to sell it. Of course, we’ll have to pay taxes on it there, but will we have to pay capital gains taxes on it here in the US? This home was our residence there until we returned to the US a little over 2 years ago. We had a rental home in the US which is currently our permanent home.

    Thanks.

    Dudley

  47. 60. cannon_fodder

    Does the superficial loss work (almost in reverse) if one shorts a stock, then buys it later at a higher price to bring one’s position to zero, and THEN buys it long, sells it at a profit all within 30 days but without realising an overall profit?

  48. 61. Xin

    Hi FT,

    Thank you so much for this article. But with current financial situation, I have more questions about capital loss. I’m thinking it’s good time for realizing my capital loss in this year. I am afraid of superficial loss rule. And also as a trader, I may do my transactions within 30 days a lot. How can I claim the loss. Just using your example but another way. Say:

    Purchase 10 ABC stock for a total cost of $1000
    Sell 10 ABC stock for: $1200
    Gain: $200
    Repurchase 10 ABC stock within 30 days for: $850
    Sell 10 ABC stock in the future for $550:
    Profit: $200(initial gain)-850+550 = -$50(Loss)

    As long as I didn’t buy it back after this loss, I can claim this $50 loss as capital loss. Am I right. So Actually it doesn’t matter how many transaction I have done between the year. As long as after your last sell , you didn’t buy it back within 30 days. You can claim loss.

  49. 62. Barry

    Terrific website – thanks for such selfless public service.

    A related question: I think it normally takes 3 days to clear each transaction if I use the cash in my account (not on margin) but what if I purchase a stock at 20 bucks, sell it at 21, it goes down to 19 and I repurchase it at that price only to sell it at 22 … and all the buying and selling occurs within a 30 day period.

    Fat chance! But is this legal and are the only tax implications just a capital gain on two separate occasions within that period … taxed on the usual 50% of your gain?

  50. 63. Jeanette - single mom

    I currently have capital appreciating stocks within my RRSP…what is the best way of getting them out? They are currently in a loss position.

  51. 64. Mike

    Simple question:

    If I sell some stocks in 2008 and am an overall net loser on the year, can I still claim the capital loss against my income tax?

    Or do the capital losses roll over to the next year and offset any capital gains?

    How long can you keep rolling over these losses? Ie. what if I don’t sell any stock in 2009, can my 2008 capital losses be claimed in 2010 or 2011?

  52. 66. David Newing

    mutual funds in a NON-REGISTERED, portfolio are they treated the same as a regular stock when purchased or sold, capital gains or losses ?
    Thanks for the lessons, they’re great Dave

  53. David, the answer is yes, mutual funds are treated the same as stock in a non registered account.

  54. 69. Jay

    I was hoping someone would answer Zin’s questions?

  55. I believe Zin is correct. However, it would be best to double check with a tax professional.

  56. 71. Al

    Are forex earnings taxed under capital gains ?

  57. 73. RM

    I have a question about your RRSP vs. non-registered account conclusion. When I contribute to my RRSP, the contribution is tax deductible. So (simplistically) if I’m in the top marginal bracket and get a $5,000 bonus at the end of the year, I can contribute $5,000 to my RRSP to earn investment returns. After 30 years at 8% returns (all cap gains) I would have $50,313 in my RRSP. If I took it all out, and was taxed on the full amount at the top marginal tax rate (43%) I would have $28,679 (=$50,313*(1-43%)).

    Now, if instead I invested the money in a non-registered account outside of my RRSP, I would start with $2,850 after tax (at 43%). Compounding this at 8% for 30 years I would have $28,679 in my non-registered account. If I sold all of my securities at that point and realized a $25,829 gain (=$28,679 minus $2,850) I would incur taxes of $5,553 (=$25,829*50% inclusion rate*marginal 43% tax rate). This would leave me with $23,126 (=$28,679-$5,553).

    If I compare the two, I’d be $5,553 wealthier ($28,679-$23,126) by investing through my RRSP. Note that, the benefit from investing through my RRSP would be even greater if I begin drawing from my RRSP after I retire, because I would no longer be taxed at the top marginal rate on the money that I am withdrawing (since the withdrawals from my RRSP would be my only source of income).

    Let me know if there’s something wrong with my analysis.

  58. RM, at first glance, your math looks correct. Looking back, perhaps I was a bit quick to assume that keeping capital appreciating investments outside the RRSP is the best bet. However, one thing you have to note is that you assume that the investor reinvests 100% of the tax refund. Once the investor starts “spending” the rrsp tax refund (which is, unfortunately, what a majority of people do), the rrsp’s power quickly dwindles.

    A common question these days is not rrsp vs non-reg, it’s now rrsp vs. tfsa.

  59. 76. mojo30

    Hi Guys,

    first post, I have been browsing off and on for a while and decided to join the conversation.

    Do capital gains taxes have to be paid if the money is not withdrawn?

  60. mojo30, in a taxable (non-reg) account, capital gains tax is owed upon selling a profitable stock.

  61. 78. mojo30

    thanks

  62. 79. Miguel

    I appreciate the article, it helps shed some light on things. I do have one question though… If you have capital gains/losses in a given year, is that sort of thing tracked for you by your broker, or do you have to keep track yourself?

  63. 80. Jay

    I have a US funded Forex account and im living in Canada. How are the capital gains calculated? Do i have to keep track of the exchange rate for every trade i make and capital gains will be calculated in the canadian currency? if so that seems like alot of work, no

  64. The real tricky part is that no one knows what tax rates will be when you want to take the money out. That’s why it’s good advice not to have all of your retirement money in one “tax bucket”. If you have it spread around different “tax buckets”, you can choose the best one to pull from depending on tax rates at the time.

  65. 82. poor white trash

    I’ve recently decided on a new registered/non-registered strategy please tell me what you think. It’s pretty simple but i dont know if anyone really thinks of it.

    1. Invest everything in non-registered equities
    2. put 50% of any capital gains into RRSP’s

    putting 1/2 your capital gains into RRSP’s will give you a deduction that year equal to what you owe the Feds on the capital gains.

    Basically you get to invest the money in RRSP’s now that otherwise would goto the government for free. Then even if you lose it all in RRSP investments it was the governments money anyway.

  66. pwt, yes that will work and will result in $0 capital gains tax. However, note that when you withdraw from the RRSP down the road that it will be taxed as income.

  67. 84. sam

    Please guru help me out on this..
    I have capital gain this year around $1000 on ths stock with Etrade and i have RRSP with different institution so is there any way if i can move this money to RRSP to save capital gain amount.
    Not sure how it will work but please advise.

    Thanks

  68. Sam, I’m no guru. :) But to answer your question, if you transfer shares to an RRSP, it’s deemed to be sold on the day of transfer. So if there’s a capital gain, you will have to pay tax anyways. If you really want to avoid the capital gains tax, you could donate the shares to charity.

    http://www.milliondollarjourney.com/charitable-donation-tax-credit-part-2-strategies.htm

  69. 86. invetor

    Great information.
    I have a few questions need to be clarified.
    I am going to buy etf XDV through sharewoner. I know there is ROC.
    Like you said I have to half the ROC as my income.
    If I use qicken to file my tax Is there form available for the ROC.

    Thanks

  70. invetor, here is a detailed explanation of how return of capital works.

  71. 88. invetor

    Great information.
    I have a few questions need to be clarified.
    I am going to buy etf XDV through sharewoner. I know there is ROC.
    Is XDV good for Drip

    Thanks

  72. I know that XDV can be under a synthetic DRIP with any discount brokerage (ability to buy at least 1 share/distribution, otherwise distributed as cash). However, I don’t think you can drip directly from ishares.

  73. 90. paul

    Hi guys,

    I am about to sign up for a questrade platform. But could not decide if i want it to pay for my platform fee from within the rrsp account or non rrsp. is that fee deductable.

    Thanks

  74. paul, investing fees should be paid outside an RRSP. The reason being is that RRSP contribution room is limited, so might as well use non-rrsp dollars to pay expenses.

  75. 92. Paul

    One follow up question, is it okay for me to assume that platform fees paid will be deducted for tax purposes in non registered, non business account?

  76. 93. F A

    Hi everyone,

    I am a futures (eminis, etc) day trader in Canada. Can someone tell me or direct me to an appropriate link where I can find how gains from futures trading is taxed? I am under the impression that futures trading gains are taxed as Capital Gains. Please feel free to provide your comments and share your knowledge.

    Thank you.

    F.

  77. 94. F A

    …and to add on:

    I am a full-time trader, hence my gains from futures trading is my ONLY source of income.

    Thanks

    F.

  78. 95. Annette

    I am looking at the possibility of cashing out some stocks for the sole purpose of re-purchasing and investing them held in my TFSA. I understand that I will take a hit of about 20% of the capital gains of the stocks( or 40 percent of half of the capital gains earned) if I am in the highest tax rate. Is there any way that I can avoid this? Is there any way that this could apply to the 750,000,000 personal tax exemption for capital gains in Canada? What would you advise? Thanks

  79. Annette, the $750k cap gains exemption is for owners of ccpcs (Canadian controlled private coporations) when they sell their shares. It does not apply to investors who purchase public shares.

    There’s not a lot you can do to avoid the capital gains other than selling your losing stocks to claim the capital losses against your gains. As well, if you haven’t maxed out your RRSP, contributing will help reduce your tax burden.

  80. 97. cashback cards

    Is it always going to be right at 50%, and/or is that strictly Canada? Just wondering.

    Great information though! Really makes you think about where you to put your money and how to make it really work for you and not the gov’t.

  81. 100. lorca

    Hi FT,

    Great article! I’m new to investing and am trying to be more tax efficient.

    I’ve maxed out my TFSA but my spouse has $10 000 unused contribution room. I would like to sell $10 000 worth of equity mutual funds in my non-reg account at a loss to offset some gains and repurchase the same funds at the same time (as I believe that they will rebound and potentially do well in the future) in my spouse’s TFSA to shelter future capital gains.

    Does the superficial loss rule apply to repurchasing within 30 days under a spouse’s account?

    Thanks

  82. 101. Peter

    Silly question- does your broker send you forms indicating your capital gains?

  83. 102. FrugalTrader

    Peter, from my understanding, you are responsible for tracking your own buy/sells, there for your capital gains/losses. Most brokerages can provide a summary of your trading activity for the year.

  84. 103. Xtrykr

    Hi FrugalTrader, say I have the following scenario:

    Aug 20 Bough 40 shares of A for $100
    Aug 24 Bought 20 shares of A for $50
    Sep 01 Bought 20 shares of A for $50
    Sep 10 Sold 80 shares of A for $150
    Sep 14 Bought 30 shares of A for $50
    Sep 23 Bought 20 shares of A for $75
    Sep 30 Bought 20 shares of A for $75
    Oct 01 Sold 70 shares of A for $150
    Oct 08 Bought 40 shares of A for $100
    Oct 16 Sold 40 shares of A for $150

    How do I interpret this? Do I work it out as:

    1) cap loss $50 from Sep 10 Sale plus cap loss $50 from Oct 01 Sale = $100 cap loss against $50 cap gain from Oct 16 sale, which is net cap loss of $50?

    OR

    2) Cap loss $50 from Oct 01 Sale against $50 Cap gain from Oct 16 sale, which is net zero? (due to repurchase of stock within 30 days?)

    The problem I’m running into is I have several stocks in my portfolio that I day traded (I’m not a professional day trader, was rolling the dice on a couple of my picks). I have completed a series of about 20 trades with a particular stock over the span of 3 months. Based on the rule, I have many superficial losses on some of my picks, and as a result, would like to know how to interpret this in my scenario. Thanks in advance!

  85. 104. Xtrykr

    I actually have one more question, do I have to fill out a Schedule 3 for EACH stock I have traded, and disposed of, resulting in a gain/loss? (I saw the Schedule 3 form, it only has one line for one company!). I have traded about 15 different companies, do I have to fill out a schedule 3 for each of these? Or can I just staple my spreadsheet with my ACB and capital gain/loss calculations to it and tell them to refer to it? Thanks!!!

  86. 105. Lisa

    Great Info
    Just wanted to check. I pulled money out of my RRSP throught homebuyers this year. It was at a loss. Can I claim this as a capital loss? I am thinking not but wanted to check.

  87. 106. Lora

    Hi
    My bank over charge me interest in my margin account that I used to invest in stocks. I received a letter from my brokerage that they miscalculated the interest, and putt back the money in my investment account my question is for tax purpose what should this amount of money that I paid before as an interest be considered after I got it back
    Interest income ,so it will all taxes or
    capital gain so 50% will be taxed,
    or it was calculated in my tax calculation for year2009

  88. Brilliant information here! Being a Canadian myself, this has taught me a lot of insight on capital gains tax. It’s important to remember it’s not about what you make, but what you keep. With these strategies in mind, I’ll know how to protect my capital gains big time!

  89. 108. Ed Rempel

    Hi Lora,

    It would be a refund of the interest you paid on your margin account, so you should use it on your tax return to reduce the interest deduction.

    Ed

  90. 109. Gurdeep

    Hello,
    Slightly off topic, my mother received shares from her late husband’s estate. There was both a transfer fee and a fee for securing a bond to allow the transfer of non-probated assets. Can both these fees be factored in when calculating capital gain later (i.e. deducted the same way a brokerage fee for purchase/sale would)?

  91. 110. Karim

    I am sure this has been asked before but I can’t seem to find an answer to this. Suppose you’ve accumulated capital losses in trading stocks. If you then incur capital gains from the sale of real estate, can capital losses from stocks be used to offset capital gains from the sale of real estate?

  92. 111. FrugalTrader

    Karim, yes, you can use capital losses from stocks to offset capital gains from real estate (and vice versa). In fact, I did that in 2009, sold stocks at a loss to offset capital gains from a rental property sale.

  93. 112. Ben

    I am close to retirement and I have accumulated stocks in a non registered account during my career through a company stock purchase plan.

    Being close to retirement, I am now more risk averse and would like to move these stocks to a safer place such as Government Bonds. Wouldn’t doing this now push my already high marginal tax rate up and result in capital gains being taxed very highly compared to keeping the stocks and selling them little by little during my retirement years when I have less income?

    Is there any ways to move my non registered portfolio to safer grounds without being punished for doing it in one move during the years with the highest marginal rate of my career?

  94. 113. FrugalTrader

    Ben, if you sell or transfer the stocks, I believe that you will face a capital gains tax. You might be better off waiting until retirement to sell, that is, if you believe your company will continue to be strong until then. Ofcourse, you may want to consult with an accountant.

  95. 114. Ed Rempel

    Hi Ben,

    There are a few issues to your question, Ban. Yes, if your shares are up, the capital gain will be taxable. However, it is only 50% of the gain that is added to your income, not the amount you sell.

    If you buy bonds, the interest is all 100% taxable every year, which will also run into more tax.

    You should probably consider the non-tax issues as well. Having all your shares in one company is very risky – far more risky than owning a broad stock market investment. Any one company can go bankrupt.

    Many people somehow think that having shares of the company they work for is safer, because they know the company. However, they already have their job and more tied up in that company.

    The general rule of thumb is that you should have no more than 5-10% of your investments in any one company – even one you work for.

    It probably makes sense to become more conservative when you retire, since you are no longer adding money to your investments, but probably the biggest mistake many seniors make is to become far too conservative. You probably still have 25 years in front of you if you are average health, so it is probably still appropriate to have a significant growth portion of your portfolio.

    The best strategy might be to sell most of the shares and buy a diversified portfolio based on your risk tolerance and retirement income/growth needs, using some far more diversified investment for the equity portion.

    There is also the issue of whether you should sell now or after you retire, or if you should do it all at once or sell over time. Depending on your income, you may be in a lower or higher tax bracket after you retire. Most seniors are also affected by various clawback programs on income from the government. When you add that to normal income tax, many seniors are in 40-70% tax brackets, so don’t just assume you will be in a lower tax bracket after you retire.

    Since your investments are non-registered, your choice of investments will have a significant effect on your tax bracket, so you have lots of planning options.

    Ed

  96. 115. Tommy

    Hi Ed,

    Thanks for explainging the “30-day rule”. Since I have 40K non-registered money, and still have a personal mortgage, I am looking to perform SM by paying down my mortgage first and then reborrow for investments.

    A lot of stocks are still down, if I decide to sell at loss, and repurchase back within 30 days, I technically lose the “capital loss” priviledge. However, if I am purchasing the same stock within 30 days, and I still see the future growth of the stock, the loss portion can be deducted from the profit when I do sell the security in the future right? In words, the loss can reduce the adjusted cost base of the same security?

    ie. Buy Stock A for $1000
    Sell at $800 ($200 loss)
    Repurchase in 3 weeks at $900

    In the future, I sell at $1200
    My adjusted cost base is 1200 – 900 – 200 loss = 100 capital gain

    Is this correct calculation?

    Thanks!

  97. 116. Emily

    FT,

    Slightly off topic however, I am looking into the SPP with BNS and can only find info for current shareholders wishing to acquire additional common shares of the Bank. How do you go about becoming a shareholder in the first place. I found this same issue with many Canadian companies offering SPP. I am very new to this so would appreciate some direction. Great article by the way!

  98. 117. FrugalTrader

    @Emily, to purchase via SPP, you need to contact the company directly. For example, with Scotia Bank, you can find the info here:
    http://scotiabank.com/cda/content/0,1608,CID1017_LIDen,00.html

    Best of luck!

  99. 118. Alex

    It’s my first year investing in US stock with a Canadian broker( questrade ). I was wondering if I have to fill up special income tax forms for US stock that I sold in my non-reg account? And do I have to file something to the US gov?

  100. 119. FrugalTrader

    @Alex, no tax payable to the US govt. However, if you invest in US stocks in the future that have dividends, you can request to have your withholding tax reduced by contacting the discount broker. They will send out a form to complete.

  101. 120. Donna

    A Canadian owns a company and manages investments for his clients through the rental of a seat on the NYSE and a subscription to a service which enables trading (ie Interactive Brokers). 82% of the income comes from management fees charged to the client. The company also has some cash which the person uses to trade futures . He does day trading with this account. This is the other 18% income for the company. A T5008 is received at the end of the year. Is the reported income a capital gain or regular income? thanks

  102. 121. Pasan

    Hi,

    If I transfer a stock from a non-registered account to TFSA, I was under the impression that, it count as selling the stock from the non- registered account for Tax purposes. If I had a capital loss on that stock, can I claim that loss?

    e.g Bought stock ABC at $1000 in non-reg. account and transfered to TFSA when it is $800. Can I claim a loss of 200?

    Thanks!

  103. 122. FrugalTrader

    @Pasan, in that case, you’re better off selling the stock, claim the loss, then contribute the cash to the TFSA.

  104. 123. Ed Rempel

    Hi Pasan,

    CRA is not allowing capital losses on transfers “in kind” to a TFSA. If you transfer in a stock that has a gain, you have to claim the gain, but if there is a loss it is denied.

    You should follow FT’s advice – sell the stock first and then contribute the cash.

    Ed

  105. 124. Rob

    Frugal Trader,
    I am a frequent trader, not a daytrader but a swing trader. I was wondering if I have to declare all capital gains for each transaction regardless the amount, or there is a min to declare. I ask this because there are transaction that I came out flat ( maybe made 5 dollars or so)

    thx

    rob

  106. 125. FrugalTrader

    @Rob, my understanding is that you need to calculate all your transactions, no matter the amount. Best to confirm with an accountant, but that’s what I’ve had to do in the past.

  107. 126. Ian A Rocks

    I am a US citizen and wish to invest in Canadian Stocks in a Canadian and USA stocks and commodities in a Canadian denominated account. I will
    be considered a trader. I will have no Canadian employment income.

    A. If i have $20,000 in capital gains what will my Canadian taxes be?

    B. Will the amount of Canadian taxes be credited against my USA taxes due

  108. 127. Cathryn

    Number 73 is correct on the math.
    Also, do the math on TFSA’s vs RRSP’s – and see the interesting
    result there. Since the two vehicles deal with tax at different entry
    points, it is best to do the math right through two examples with
    indentical earnings.
    In Retirement, a RRSP – converted to a RRIF also gets an additional
    $2000 tax exemption ( x 2 if you have done Spousal) plus there
    is the added factor of the additional age tax credit along with the
    already existing personal tax credit.

  109. 128. Nova_Scotian

    Wondering how to calculate this.

    Owe 100 shares of a company that is DRIPPed.
    Then buy 150 shares of this company and put in a sell order to sell 150 shares.

    How do you record capital gains and ACB for the 2 scenarios
    (1) The 150 shares are sold before the ex-dividend date, so no DRIP
    (2) The 150 shares are sold after the stock as DRIPPED

    Any help would be appreciated.

  110. 129. Showtime

    Good tips. I have been questioning the merits of non-reg acct in general if there is still contrib room in tfsa or rrsp. I was thinking about this even before I came across RM’s post #73. My thinking is that non-reg is actually getting taxed twice: once at marginal rate because non-reg is funded w/ after-tax dollars, and taxed again when it generates gains/divs/interest, etc. Rsp and tfsa are only taxed once, tfsa at funding and rsp at withdrawal. There are some reasons to contrib to non-reg (eg can claim cap losses, no limits, etc) but it could be argued to not even use non-reg while one still has tfsa and rrsp room. That said, it should be noted for certain income levels (varies per province), divs in non-reg acct are exempt from tax…not only that cra will actually pay you, ie negative tax rate on divs.

    Something else to consider is growth of investment eg $100k into an acct and it grows to $200k for withdrawal. Due to this factor (and other factors), non-reg withdrawal tax may actually be lower than rsp over a very long time, maybe 30+ years. Even tho non-reg is being taxed twice (in and out), the lower tax on divs and gains may eventually be more economical vs rsp’s perpetual marginal rate for withdrawals, but probably after many decades.

  111. 130. toasty

    Little late to this thread, but I believe stating that keeping capital gains outside of RRSP is correct, but for different reasons than stated here. You say:

    “The 50% inclusion rate is a reason why most financial gurus suggest that you keep investments for the purposes of capital appreciation/gain outside of your RRSP. If you keep your capital appreciation/gain assts inside an RRSP, you will be taxed on 100% of the gain because all income withdrawn from an RRSP is taxed at your marginal rate.”

    The problem with this statement is that you are forgetting that the 50% is on profits of after-tax money. So in actuality you are getting taxed twice which comes out to more than the 100% if it were in RRSP, which is pretax money.

    I think what they are trying to say is that is would be better to put in other types of investments which are taxed at a higher rate than capital gains.

    Example:
    You have $1 to invest. Assumes constant tax rate of 0.33% and 10% growth over whatever period.

    RRSP: principle * (1 + growth) * (1 – tax rate)
    RRSP: $1 * (1 + 0.10) * (1 – 0.33)

    = 0.737

    non-reg: principle * (1 – tax rate) +
    principle * (1 – tax rate) * (growth) * (1 – tax rate / 2)
    $1 * (1 – 0.33) + $1 * (1 – 0.33) * (0.10) * (1 – 0.33 / 2)

    = 0.726

  112. 131. trollmonger

    My wife owns a house that is not her primary residence. Accordingly, she will pay capital gains taxes when she sells.

    But what will be her tax rate? Is the capital gain part of her income? For example,

    Purchase price: $200K
    Sale price: $600K
    Capital gain is $400K of which $200K is taxable.
    If her employment income is $40K, is her tax rate based on 40K or 240K for that year?

  113. 132. FrugalTrader

    @trollmonger, best bet would be to input your tax scenario into a tax calc, like taxtips.ca, and see what kind of tax owning there will be. As well, did you wife life in the home at all? If so, then the adjusted cost base will be different than her purchase price.

  114. 133. trollmonger

    Thanks FT,

    Taxtips answered my question. It wasn’t the answer I was hoping for though. That’s a lot of taxes!

    She did live in the house before we married. Her parents live there still. I didn’t think to have the house appraised when she moved out but I’m sure we’ll find a way to estimate the value at the time. We just need CRA to agree.

  115. 134. Dan

    Hi FT,
    I just found your blog and it is an awesome blog seems I am pretty much on the same boat as you are.

    A quick question about Capital Gain. I have a decent size investment managed by a private investment firm (a division of a big bank) on a non registered account which currently have about $50K capital gain should I liquidate the account. The investment is invested in money market, stocks and bonds in Canada and US.

    I recently decided to learn more about investing and have a self-directed account for RSP and TFSA on a brokerage account of the same bank. My goal this year is to take over my non registered investment account from the private investment firm and self manage it. Hence, avoid the hefty fee that they charge every month.

    My question is: when I am ready to take over my non registered investment account, should I liquidate it and realized the $50K capital gains? or will I be better off to actually transferred the investment to my discount brokerage without liquidating the assets? i.e. carrying the original costs of the investments to the discount brokerage (I understand from my broker that this is possible since both my discount brokerage account and non registered investment are divisions of the same big bank).

    FYI: this year my marginal tax will be very low since I took some time off and have not earn much income (my expected income outside any capital gain will be in the $20K-$30K neighborhood).

    Thanks FT,

  116. 135. FrugalTrader

    @Dan, thanks for the kind feedback. Do you still like the investments that are held in the private account? If so, then you should consider simply transferring in-kind to another non-reg account and managing them from there. I believe brokerages will charge about $150 to transfer stocks/bonds over to a new account.

    Does this help?

  117. 136. Dan

    Thanks FT,

    I do like some of the investments but will definitely get rid some of it.

    Consideration to liquidate or not was more for the tax purposes since this year my marginal tax will be at lower rate. I thought it would be a good idea to realize the gain. But I am not sure if that will actually matter.

    Thank you.

  118. 137. FrugalTrader

    @Dan, it’s never a bad thing to pay less tax! However, you also need to look at the big picture and if you would sell the investment at all if it weren’t for the tax consequences.

  119. 138. Mike

    Let’s assume that I buy 100 shares of the same stock each month for 25 years, and plan to sell them for retirement income as needed. It’s safe to assume that the price per share will change month by month, or year by year.

    In 25 years from now when I start selling portions of my portfolio for retirement income, how do I know what price I paid for the portion of shares I’m selling?

    Thanks,
    Mike

  120. 139. Danielle

    Mike, the adjusted cost base of the shares is affected each time you buy more shares. If you continue to buy shares and the price per share goes down, then this will decrease your ACB. And subsequently affect any gains you may have. When you eventually sell, the gains and losses are calculated using the adjusted cost base. Think of all the shares going into a cost “pool” in which the cost is adjusted every time you buy more shares of the same company.

    When you do sell the shares the taxes you pay will be based on your marginal tax rate. Any capital gains will be included in your income for that year (50%). The other 50% of the gain is not taxable.

  121. 140. gogernator

    HI Folks, I have a quick question – I have a capital loss that I’m carrying of around 11k, I’m going to sell some stock options I have creating a capital gain, is the loss applied against the gain only, or on total amount of the share options excersied? An example would be:

    I excercise 40K in share options and recieve 30K in net cash (50% of 40K is 20K taxed at 50% = 10K in tax). Would my capital loss of 11K be applied against the 20K in capital gain gross ie my 20K becomes 10K and I now only owe 5K in capital gains tax?

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