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Covid Contemplations: What to Do If You Have Been Socially Distanced by your Finances

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In this eerie time of social distancing, medical mayhem and financial carnage, I feel like a background character in a cheesy made-for-tv movie starring B-grade actors from the 70’s. Unfortunately,  the chaos and risk are all too real, although the consequences and aftermath remain a riddle wrapped inside an enigma.

For those of you, however, who are trying make sense of their financial picture, I do have a few suggestions to lessen the financial pain and some things to keep in mind when you are deciding what to do next.

Consider Future Tax Issues When Making Your Financial Decisions Today

When reading some of the tax-planning options I discuss below, particularly those about harvesting capital losses, it’s also really important to consider how things might look a few years down the road when Covid19 is hopefully a distant and not particularly fond memory, like door-to-door salesmen and (fingers crossed) manbuns. I simply can’t imagine a future that doesn’t include significant tax hikes, particularly for those in the higher tax brackets or for most people in their year of death. I also worry if this might also include increasing the inclusion rate for capital gains from 50% or, for those of you not up on tax-speak, what percentage of any realized capital gains is actually included as taxable income and what part is tax-free. Keep in mind that this was something tax types were stressing about even before this all came down.

In the past, as much as 75% of capital gains were taxed on sale. If the inclusion rate goes to 75% again, this would mean paying 50% more tax on gains than we are right now! For example, if you had a $10,000 capital gain and were in the 40% tax bracket, you’d have to pay $2,000 in tax at the 50% inclusion rate ($10,000 x.50 x.40). If it goes to 75%, then you’re out of pocket $3,000 ($10,000 x .75 x.40). Hopefully, if the inclusion rate is increased, it’s not quite so drastic – I just used 75% as an example since it was a number our government had charged previously. Essentially, just like when setting any other tax rates, they can pick any number they want, limited only by the fact that they want to get re-elected and probably don’t particularly enjoy having their likeness burned in effigy.

A) Capital Gains

For those of you with unrealized capital gains from those bank stocks you bought in the days of disco, there are some planning opportunities available for you, particularly if you expect to be in a lower tax bracket than usual this year anyway.  Here are some of the reasons why you might want to trigger some of those gains now:

  • Your other sources of income are also affected this year and you’ll be in a lower tax bracket than usual. Although paying taxes ahead of schedule is not something I love doing, you might be better biting the bullet now vs. selling in a few years during the new tax reality. It also may also mean not having as much money in the market to capture any future market recovery and receive dividend payments if you have to divert some of your capital to pay the tax bill next year unless you have offsetting capital losses so consider this carefully. On the other hand, it’s not like you need to pay the tax bill today – this is a bill you won’t need to cover until April 2021.
  • You have other stocks that are underwater and would generate capital losses upon sale. You could apply those losses against those gains so you won’t have to pay the tax man this year and can keep all of your capital invested to hopefully participate in any recovery and generate income while you wait.
  • You have losses from previous years already on the books to use up so you won’t actually be triggering a tax bill. Triggering gains at the current inclusion rate, even if you aren’t actually paying any tax on them because of your offsetting losses, will still save you tax in the future if inclusion rates change going forward as I explain later in this article.
  • You are worried and were going to take some money off the table anyway.
  • Your portfolio wasn’t properly diversified, previously, it would have meant paying too much tax to rebalance previously. Now that values might have declined, that tax bill isn’t so high and the tax pain isn’t too great. Although you are selling when markets are down, you will also be purchasing your new investments at a discount. This works even better if you have some of those offsetting losses we also discussed.
  • Your risk tolerance has changed, or you no longer like your current mix of investments anyway.
  • Your capital gains are inside your company and you are really worried about the inclusion rate for gains increasing going forward. If this happens, corporate investors will suffer another hit. Our tax system allows companies to pay out the non-taxable portion of capital gains tax-free to its shareholders (i.e. currently the 50% that isn’t taxed). If the inclusion rate went to, say, 75%, then shareholders would only be able to take out 25% of the gain tax-free, which is half of what they can do now. When coupled with the higher tax rates we’ll likely be paying in general going forward, this might be enough incentive to lock in those tax-free payments now, particularly if the business owner isn’t making as much money from other sources that year anyway. If this might be you, then you might hold off on selling company-owned investments that have losses, as realized losses offset how much of the gains you can withdraw tax-free.
  • You are looking at other uses for your money, such as permanent life insurance, income-splitting it with a spouse or through a family trust, paying down debt or perhaps helping the children out a bit more now than you’d previously anticipated.

As a final point, it is also important to remember that if you do sell a stock that is in a capital gain position but you still love it, there is nothing that stops you from buying it back whenever your heart desires. Although you must wait 30 days after selling a loser before repurchasing it, there is no such rules when reconnecting with a former flame that you previously sold at a profit.

Capital Losses

When deciding whether or not to trigger capital losses, here are some of the things to keep in mind when making decisions:

  • If tax rates and the inclusion rate both increase in the future, triggering capital losses in later years to offset future gains might save you more money over time than triggering them now, particularly if you’re ultimately going to be in a higher tax bracket in the future anyway.

 We talked earlier about how the inclusion rate works for capital gains and how an increase of the inclusion rate from 50% to 75% would mean including $7,500 of every $10,000 capital gain as taxable income rather than just $5,000. The same is true for capital losses – if the inclusion rate was increased from 50% to 75%, this means that you get to deduct $7,500 per $10,000 of bad decisions rather than only $5,000.

It all comes down to when you trigger the losses. Typically, when inclusion rates are increased, those increases don’t apply to losses already on the books. For example, if you trigger a $10,000 gain in a dystopian future reality where inclusion rates are 75% but had an unused $10,000 capital loss on the books from this year, the two would no longer cancel each other out. Because you triggered the loss at a time when the inclusion rate was only 50%, you would only get to deduct $5,000 of that total loss of $10,000 but had to include $7,500 of the $10,000 gain as income, meaning you would still need to pay tax on $2,500. It’s always possible that the government could increase the inclusion rate for past losses if they decide to increase the inclusion rate for new gains. Personally, I think it’s more likely to find discount hand sanitizer  and toilet paper on sale next week than for that to happen.

  • If you want to trigger capital gains this year for some of the reasons discussed above, i.e. you’re going to be temporarily in a lower tax bracket and are okay paying some tax now at current rates, you won’t want to trigger any capital losses this year, as they have to applied against this year’s gains.
  • Triggering losses now will give you more flexible for rebalancing your non-registered portfolios going forward since you can apply these losses against future gains so that you can rebalance without tax consequences until those losses are used up.
  • You have some big capital gains from the last 3 years and want to carry back this year’s losses to get back some of last year’s taxes. You’ll have to wait until you file your 2020 tax return to do this, but it might be worth the wait if you were in a high tax bracket then and don’t expect to be in the same place going forward.
  • You adopt the bird-in-the hand approach and want to deal with today’s taxes and inclusion rates rather than guessing about how things might look in the future. Likewise, you might expect some of your losers to rebound and might want to just lock in the losses now for flexibility’s sake even if this means having more taxable capital gains in the future if your reinvested dollars make money.

As a final thought, it is important to remember that you,  your spouse, your company, etc. must wait 30 days to repurchase any investments you sell in order to be able to realize your capital loss. If you are still really bullish on the investment’s long-term future, then you could look at similar alternatives, at least until the 30 days have expired, unless you’re happy to sit on the sidelines for the short term.

Find Some Balance

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Somewhat ironically, some of my client’s biggest financial planning headaches a few weeks ago was not being able to rebalance their portfolios without triggering big tax bills. In many cases, this meant having a disproportionately large share of their investments in perhaps a few stocks that had been in their lives longer than their children.  Adding to the risk,  many clients owned several similar stocks in the same sector with the same problem, such as perhaps 3 or 4 Canadian bank stocks they’d first started acquiring when the first Trudeau was doing his thing.

All that has now changed. Although you may still love your BMO or Royal Bank shares, it may now be possible to trim those positions in favour of a new infatuation. It doesn’t mean abandoning all of those legacy stocks, but merely hedging your bets. Although playing the field is not a great recipe for romantic success, investing is an entirely different kettle of fish. Rather than just looking at the tax side of things, you might be better off focusing on building a properly diversified portfolio that fits like a glove even if it means cutting an extra cheque to Ottawa in order to make this happen.

If you are looking to rebalance, perhaps this is the time to add a few new types of investments to your portfolio, particularly:

  • some that don’t trade on the stock market and hopefully haven’t taken as strong a gut punch to their prices as public market stocks have suffered;
  • expanding your portfolio geographically beyond just Canadian dividend payers and some companies from down in Trumpland;
  • investments that offer some downside protect through options or the ability to short-sell or which are designed to allegedly make money in any market conditions, although this doesn’t always happen.

The current buzzword is that people should “invest like a pension” and strive for less risk and smoother returns by expanding their mix of investments. Although even pension funds or companies that invest like them have taken a kick to the teeth this last month, their extra levels of diversification have generally helped them some of those extra body blows that the average Joe has endured.

Look to Refinance Loans

For those of us with mortgages, one of the consolation prizes (albeit one on par with a getting a participation ribbon for finishing  58th place in a 5 km race) are much lower borrowing rates. If you have loans of any type, get professional advice regarding whether it makes sense to redo those loans at current rates despite any penalties that might apply.  For those of us with variable loans, the monthly savings can be really significant and will hopefully help ease the pain for years to come.

For those of us with family trusts and loans at 2%, start planning to refinance those loans at 1% this July, as it appears very likely that the minimum loan rate will drop back to 1% at that time.  This will also apply to spouse loans as well, so it’s worth looking at updating those too. Despite the hassle, it’s recommended that you actually physically repay past loans and then re-advance the funds.

This will allow more future investment income to be taxed in low-income family members’ hands and less in yours at your higher rates.

Consider Setting Up a Family Trust or a Spousal Loan

If the rates do drop to 1% in July (this will be clear by the end of April and is based on a government formula that suggests that this will happen with room to spare), then those of us with large unregistered investment portfolios have the opportunity to income-split a lot more successfully with spouses, children and other lower income family members. Noting the current yields on many investments and the hope of stocks eventually recapture some of their past glories, the tax savings from loans to family investment trusts or spouses are even more mouthwatering. Until now, the unrealized gains on the higher income spouse’s portfolios may have been a deal breaker, as it meant paying too much tax to free up the capital to loan to your spouse or trust. For better or for worse, this may no longer be the case, both because of reduced gains and perhaps if the higher income spouse is in a lower tax bracket this year.

Be Prudent If Investing New Money into the Market Today

Although current yields on many investments are (apologies to my vegetarian, vegan or pescatarian readers) as mouthwatering as prime rib on a cold winter’s day, there is still a lot of uncertainty in the market. Although it is a personal decision as to whether you wish to deploy any dry powder you may have to take advantage of these eye-popping yields, do keep in mind that we might not have seen the bottom and it’s hard to determine how the fallout will affect different stocks and industries. Consequently, you may wish to keep in mind some of the following if you’re contemplating dipping a toe back into today’s rather frothy investment waters:

  • Consider dollar cost averaging rather than trying to do market timing. We don’t know if we’ve hit the bottom so you may benefit from easing money bank into the market over a number of weeks or months rather than going “all in” on what your fortune teller says is your lucky day.
  • Yield is a wonderful thing. If you do want to put new cash into the market, take advantage of those high yields rather than counting on future gains. The income will reduce the risk and can be redeployed back into the market if you so desire or can be a way of providing more money for your family during a time when many family budgets will be stretched extremely thin. Because of the current calamity, even blue-chip stocks have yields formerly reserved for junk bonds. As a result, there is no need to travel too far down the risk spectrum just to get a few more percentage points when safer stocks are already paying you handsomely
  • Be sure that you have a sufficient contingency fund set aside to cover you and your family’s expenses so you’re not stuck having to sell some of those investments you just purchased at the worst possible time. If in doubt, bump  up the size of the contingency fund.
  • Be even more conservative if you are borrowing to invest. Although rates are astonishingly low right now, leveraged investing only works if you can pay back your loans when the time comes. Accordingly, think long and hard before proceeding and reread my last three bullets at least twice. I strongly suggest staying away from margin accounts at this point as a margin call might ultimately be the financial kiss of death. If you do borrow to invest, carefully investigate the spread between secured lines of credits and borrowing using a traditional mortgage. Despite the decrease in rates, there can still be a big difference in cost between borrowing using a HLOC or using a mortgage. Although the mortgage option is less flexible and requires you to also pay down some of the principal with each payment, it might still be the way to go.
  • Diversify, diversify, diversify. Because the fallout is still so uncertain, spread your money over many different sectors and investments. It’s better to take some of the risk off the table by hedging your bets. Rather than waiting for fair weather and your ship to come in, consider funding a fleet of smaller boats that will see you safely into the future even if some of them don’t ever reach the shore.

Look into Estate Freezes

An estate freeze is a strategy that involves owners of private companies swapping their common shares for fixed value preferred shares. New common shares are then issued to other family members or to a family trust and all future increases in company value will be taxed in their hands. Private business owners do this sort of thing this for a couple reasons:

  • To increase how much capital gains can be sheltered from tax if the business is sold. If the existing shareholders won’t be able to shelter all the gains from tax upon sale under their own lifetime capital gains exemptions, having new growth taxed in other’s hands allows these other family members to dip into their own exemptions to increase tax sheltering at that time.
  • To minimize the tax bill on their deaths by capping the value of their shares and transferring future growth to younger generations.

Despite not owning a private company, are you the proud owner of a non-registered investment or real estate portfolio that you want to pass along to your kids, grandkids or favourite financial planner? An estate freeze might still be the thing for you. Transferring those assets into your company on a tax-free rollover basis in exchange for fixed value preferred shares lets any future growth accrue inside a family trust or in your heirs’ hands rather than yours.  As a result, when your time comes, you can pass into the great beyond knowing that your final tax bill is a lot smaller and your heirs’ inheritance that much larger than might have been the case.

In most of this instances, estate freezes only work if the new common shares subsequently grow in value.  Accordingly, doing a freeze this year when share prices for most private and public companies are at Black Friday prices can mean tremendous tax savings in years to come if values do bounce back, particularly if tax rates and the inclusion rate are both higher in the future.

Learn About Your Options

Keep informed about government programs and tax changes that might help you and your family, such as EI, reduced RRIF withdrawal requirements, extensions to tax filing and installment payments, changes to your bank rates, mortgage or loan deferral options and so much more.


I am hoping that one day, hopefully soon, we can look back on today’s events in the same way many of us look back on 2008 and 2009 and perhaps how my parents viewed my teenage years – incredibly trying and stressful, but something we all survived and put behind us.  I’ve tried to give you a lot to think about but there are so many moving parts and uncertainty that this is probably a good time to get professional advice before taking any big steps. In the meantime, let’s just focus on being good to each other and realizing that we’re all in it together.

A Stand Against Capital Punishment – Ways to Minimize Your Capital Gains Tax Bill Part 3 – More Advanced Strategies



If you’re not full to bursting with ideas on how to save on capital gains tax after my first two servings in this feast of ideas, today’s offering will hopefully round things off nicely. Here are some more strategies that you can consider for minimizing your family’s capital gains bill.

  • Trigger and Use Capital Losses Strategically. Although some people call November and early December “autumn”, we financial types think of it as “tax loss selling season.” That’s when investors look to sell some of their losing investments to create a loss they can use to offset again capital gains they’ve earned that year and then either against any of the three prior years or against any future gains if any of the loss still remains. Here are some specific things to keep in mind when doing this: 
    • The “superficial loss rules” prevent you from claiming your loss if you or your spouse buys back the same stock or fund within 30 days before or after buying or selling your loser. It also catches you if either of you buys back those stocks in a different account, such as an RRSP or TFSA,  or even in a trust or corporation you or your spouse control. Moreover, if repurchasing in a registered account, the outcome is even worse. It means losing your right to claim that loss forever, as you cannot claim your loss now and you don’t generate gains or losses inside of registered accounts, which means you won’t get to claim it later, either. Accordingly, if you still like the investment’s long-term prospects but want to trigger a loss now, consider waiting and re-buying after the deadline expires or buy a similar but not identical stock or fund asap if you’re not willing to wait.
    • Sometimes it is possible to have the superficial loss rules work for rather than against you, such as when a spouse with no capital gains or in a lower tax bracket is the one that owns the loser investments.  If the high-income spouse buys that same dog stock within 30 days before or after the low-income spouse sells it and then waits a full 30 days after that point before selling herself, then the high-income spouse will be able to claim the capital loss.

Here is a quick example of this: Jack owns a stock in his non-registered account worth $10,000 which he bought for $25,000 and is in a far lower tax bracket than Jill, who has some big capital gains to report that year. If Jack sells his stock on April 1 and Jill buys that same stock in her non-registered account on April 2 and then sells it herself on May 5, then she will be able to report a capital loss of about $15,000 on her tax return, although Jack won’t be able to do the same.

    • Consider tax loss selling for its own sake when you have big losses on the books and have similar stocks or investments you could purchase with the sales proceeds yearly. Even you don’t have any immediate capital gains to realize down the road, it’s nice to lock in some of your capital losses when you get a chance and if doing so makes investment sense. Having losses on the books gives you more flexibility in the future, such as allowing you to re-balance your accounts without triggering gains, can also mean avoiding big tax bills in years you’re in higher tax brackets. If you still love the stock, then there is nothing to stop you from buying it back so long as you stay clear of the superficial loss rules.
    • You have no choice if you have capital gains already earned that year when realizing losses – you have to first apply the losses against that year’s gains. Accordingly, be careful about your timing when selling winners or losers if your ultimate goal is to apply the loss against gains you’ve earned in past years or expect to earn in the future. For example, if expecting to sell a rental property at a big gain next year and this might push you into the highest tax bracket, either avoid selling your losers until next year or be sure not to trigger capital gains this year that would use up those losses.

Here is a quick example of some potential savings. Assume an investor with $80,000 in taxable income, including a $40,000 capital gain (i.e. $20,000 in taxable gains), has the choice to offset that gain this year by applying unused losses from the past or selling an investment with a $40,000 capital loss or triggering / applying that loss next year when he is planning to sell his rental property when his total taxable income, including $200,000 in taxable capital gains (i.e. $400,000 in total gains) is expected to be $250,000.


Total Income   Total Income  

Net of Loss

Tax Saving from

Applying Loss

Loss claimed in 2019 $80,000 $60,000 $5,640
Loss claimed in 2020 $250,000 $230,000 $9,960

Thus, by waiting until 2020 to apply the capital loss, this canny investor has about 77% more money to spend on nice dinners out.

    • Check to see if you have unused capital dividend credits on your small business before triggering capital losses. Capital dividends are dollars your company can pay out to you tax-free and represent the 50% of previously realized capital gains that weren’t taxed corporately. Unfortunately, if you haven’t already used up that room, 50% of future losses can reduce the amount of money you would have otherwise been able to pay out tax-free. Thus, do declare and pay out your capital dividends every year, even if you keep the money invested corporately so you don’t end up with egg on your face in the future when reporting future capital losses. 


  • Donate and Repurchase Your Stock Market Darlings Instead of Gifting Cash. As I explained in my recent articles on charitable gifting, if you donate appreciated stocks, the government forgives your capital gain but still gives you credit for donating an amount equal to the stock’s value at the time of the gift. If you love the stock, there is nothing that stops you from repurchasing the stock using the cash you would have otherwise donated instead. Thus, the charity gets the same gift you originally intended, you still own the same amount of your favourite stock, but the prior capital gain on that stock has now been erased. See my previous articles on personal and corporate donation to learn more about this strategy and how to use it most effectively, particularly when deciding whether to gift personally or corporately.


  • Pick the Right Person to Own the Right Investments.  As illustrated in some of the examples I’ve laid out in this series, there is a lot of money to be saved when gains are realized when you’re in lower tax brackets. One simple way of saving is having the lower income spouse own the investments with the bigger upside if (s)he is likely to be in that bracket for some time to come. If that spouse doesn’t have as much money to invest, consider having the higher income spouse pay more of the family bills so that the lower income spouse has the money to invest in that stock or real estate purchase that you’re sure will double in 5 years. In some cases, the right person may not be a person at all, but a trust that names both spouses and all your dependents that you control. As I’ve done with some of my clients, the wealthier spouse loans money to the trust at the prescribed government rate (currently 2%). Each year, you can decide how to distribute income and gains from the trust amongst everyone you’ve named as a beneficiary. If that includes minor children, university students not earning a significant income, or even older children that are in tax brackets a lot lower than yours, there is a lot of money to be saved. Although the lender has to declare that loan interest each year for tax purposes, which does have to be taken into account when crunching the numbers to make sure this is right for you, the trust does at least get to write off the interest. I’ve written about these trusts previously if you want to check out my website or comb the Canadian Moneysaver archives.

Finally, those of you with minor children can also consider setting up in-trust accounts for your young ones. Regardless of their age, all capital gains will be taxed in their names not yours, although dividends and interest would be taxed in the name of the person funding the in-trust account in most cases, with a few exceptions. Be careful when considering this option, however, as once the money is in an in-trust account, it belongs to the child. Once (s)he reaches the age of majority in their province of residence, (s)he can ask for the money with no strings attached!

  • Own the Right Investments in the Right Account.  Not only is there money to be saved when lower income family members are the ones triggering those big capital gains, there is more tax to be avoided if those gains are held in the right account! Unfortunately, many Canadians use their Tax-Free Savings Accounts as “high” interest savings accounts that perhaps pay 3% interest if the stars align just so. Instead, consider holding your investments with the biggest upside inside your TFSA and your “high” interest savings accounts on the outside looking in. Although you will have to pay tax each year on your token interest, this can be more than worth the sacrifice if it saves you mountains of capital gains tax if your TFSA investments pan out.  Just be aware that if they don’t, you won’t be able to write off the losses against capital gains.

Secondly, realize that any gains inside your RRSP will be 100% taxed upon withdrawal.  Thus, it might make sense to have more of your tax efficient investments, like those that pay eligible dividends and produce capital gains owned in your non-registered accounts and more of the interest-payers inside your RRSP. Although you should consider keeping the same overall investment allocation, you could essentially swap capital gains payers in your RRSPs or RRIFs for interest payers in your open accounts, although this is not a universal rule.

Thirdly, as I’ve written about before, it might make sense for some of us to pull money from RRSPs or RRIFs before we need it if we’re in low tax brackets and invest it in a TFSA or, if you have no room, your open account. Although you won’t have as much money to invest and compound than if you’d left your money in your RRSP, only 50% of your future gains will now be taxed and any eligible dividends you receive will now qualify for the dividend tax credit. There are a lot of things to consider when deciding whether to pull money out of your RRSP or RRIF ahead of schedule, so I recommend getting detailed planning advise before taking this step.

  • Sometimes, the best answer is to delay, delay, delay.  In some situations, procrastination is a good thing, as is sometimes the case in the world of capital gains planning. Although most of us shudder at the thought of the size of our potential tax bills at death, it might be a better choice in some instances than paying the piper ahead of schedule even at lower rates. There are a lot of moving parts in this calculation, such as how big a gain you’re facing, how long you expect to live (and ultimately pay tax at death) and the difference between your current tax rate and what you’d likely be paying at the time you’re scheduled to meet with the grim reaper. By paying tax early, you will have less money to compound going forward. Accordingly, you’ll also want to look at the expected rate of growth on your investment, too, as the higher the rate of return, the higher the opportunity cost of selling early.

The following example assumes a retiree who thinks he has 10 years to live is considering triggering a $100,000 capital gain ($50,000 of which is taxed) on a stock he originally purchased for $20,000 which averages 7% growth per year. I’ll assume it doesn’t earn any dividends. His taxable income is $115,000 that year excluding the capital gain. Alternatively, he could wait until death to sell that investment, at which time he expects to have a taxable income from all sources of over $1,000,000, which places him well within the highest tax bracket.


Total Income  Inc. Gain

After-tax Portfolio at death Net of Tax

Sell Now $165,000 $170,725
Sell at Death $1,000,000 + $182,260


Of course, when making this decision, the investor should also look beyond just tax to include important investment considerations, such as an over-concentration in one stock, his overall portfolio mix and expectations for the stock going forward. It could still be the wise move to sell off at least some of this position ahead of schedule despite tax considerations.


A sometimes-forgotten component of good investing is tax planning – figuring out how to minimize the portion of the capital gains the government takes off the table when you decide to cash in your chips and pocket some of your stock market winnings. Although it is important to ensure that you don’t let good tax planning lead to bad investment decisions – sometimes, any way you slice it, the right time to buy or sell means paying a bloated tax bill – it is also a mistake not to consider tax when making any investment decision. It’s a lot like failing to read the whole menu before ordering at a new restaurant – although you might end up making a good choice, you might have missed out on making a great one.


A Stand Against Capital Punishment – Ways to Minimize Your Capital Gains Tax Bill Part 2 – Advanced Strategies

In my first article in this series, I have hopefully whetted your appetite for ways to have your cake and eat it, too. In other words, how to best combine large capital gains with small tax bills. Today’s missive is about putting the principles laid out in that earlier article into action.

Advanced Strategies

The following suggestions will apply some of the points noted above, and, as the cherry on top, I’ll throw a few more crumbles on the table as we go that can result in even more savings:

  • Realize Gains in Your Non-Registered Accounts Strategically. Although it can be dangerous to hold onto your investments too long in some cases, as years’ worth of gains can sometimes collapse like a hot souffle in a cold kitchen when a good stock goes bad, waiting to sell when in the right tax bracket can also save a lot of tax dollars if the stars and Wall Street both align. For clients holding rental properties or large equity positions, that might mean waiting to sell until retirement or during a sabbatical year when in lower tax brackets. My example from the first article in this series illustrates the potential savings of selling when in a lower tax bracket. You might also sell off only part of an asset in a single tax year.  Assume an investor receiving full OAS who typically earns $65,000 in other income wants to liquidate a stock with an $80,000 capital gain. The following shows her tax bill if she sells it all at the end of 2019 or if she sells 50% on the last trading day of the year and the remainder on the first trading day of 2020, assuming the price and tax rates don’t change. As tax brackets are indexed, this investor might actually save a bit more by using this strategy than this example illustrates.

Scenario                      Total Gain       Taxable Gain  Total Income   Tax Bill on Cap Gain 

Single Year Sale           $80,000             $40,000              $105,000            $15,751

Split Year Sale              $40,000 / yr     $20,000 / yr        $85,000 / yr       $13,904 (combined)

By waiting one trading day to sell the remaining 50% of her shares, this investor could save as much as $1,847, including the OAS clawback amount. Some investors might even stagger the sale over 3 years to have more of the gains taxed in even lower brackets. Just keep in mind my souffle metaphor from earlier when trying to get too clever about picking the time to sell – I don’t want you getting egg on your face by holding the stock just a little bit too long and watching your capital gain turn into a capital pain.

  • Realize your Company’s Capital Gains Strategically, too.To begin, consider whether your company’s total taxable passive income for that year will exceed $50,000 (remember – only 50% of capital gains are included as passive income, which means you can earn twice as many cap gains than interest and investment dividends inside your company for this calculation) and by how much. The federal government and most provinces give a preferred tax rate on the first $500,000 of active business income per year, with this threshold reduced by $5 for every $1 your company’s passive income from the previous year exceeds $50,000. After estimating that year’s taxable investment income, then determine how much business income you expect to make and keep in the company next year. If you don’t plan on keeping any excess earnings in the corporation or if that money would still qualify for the small business rate, then no big deal. On the other hand, if triggering too many gains might impact your company’s active business tax bill in the year to come, then decide whether or not it still makes sense to sell or see if there are any capital losses you can apply or create to reduce the taxable gain.

Conversely, if you will have already lost your small business rate next year (i.e. you’re going to have more than $150,000 in passive income this year regardless of what you do), consider turning lemons into lemon tarts by triggering additional capital gains now. By gorging yourself on capital gains this year, you might find it easier to stay under the $50,000 threshold in the future.   This works best if you have a legitimate need to re-balance your portfolio anyway or where planning on realizing the gains over the next year or two in any event, as triggering tax bills earlier than necessary means having less money to compound going forward. You would have to compare the future tax savings to the lost growth and income on the money you’re paying to the government ahead of schedule in taxes. Ultimately, since there are a lot of factors to consider, including how much realizing extra gains now might impact your personal income, the decision when to trigger corporate capital gains is usually best made with the help of your accountant or an experienced financial planner.

  • Consider Investing for Capital Gains Corporately to Protect an Active Company’s Small Business Tax Rate. My last bullet explains how too much passive income inside one of your companies can increase the tax rate you pay on active business income the following year and leave you with that queasy feeling that often follows dinner at a smorgasbord.  In addition to strategically realizing gains and losses inside your company, consider whether it makes sense to focus on capital gains investments inside your company in the first place if the passive income rules are cramping your lifestyle, as well as your stomach. Only 50% of the gains are included in the passive income calculations and you can control when you trigger those tax bills when you own individual stocks or sell ETFs or funds (although you still might receive some gains from funds and ETFs along the way.) This might work even better with investments like corporate class mutual funds (if you can stomach the fees and they still work for you after the recent tax changes that can impact their tax efficiency) that are designed to minimize taxable distributions or REITs (real estate income trusts) that generally pay tax-free return of capital in full or in part up until the time of sale. As an added bonus, your company can pay you the 50% of the total gain that wasn’t corporately taxed to you as a tax-free corporate dividend, which gets more money in your pocket without having to flow out more taxable income to you.


  • Use your RRSP Room Strategically.  If you’re normally in a lower tax bracket but are expecting a super big gulp-sized capital gains in the future that will push you to the tax bracket stratosphere, consider stockpiling your unused RRSP room and using it when it is time to sell. As only 50% of any gains are included as income, $50,000,000 of unused RRSP room can offset $100,000 of realized capital gains. Also, keep in mind that your RRSP contribution doesn’t have to be a long-term commitment – you can pull a bunch of the money out during the next tax year when in a lower tax bracket if you want. Have a spouse in a lower tax bracket or who might be in the future, such as if you retire in different year? Consider making the contribution a spousal one, although keep in mind that the money needs to stay in your spouse’s RRSP for at least 3 December 31’s before withdrawals can be taxed in your spouse’s hands.

Here is an example to show some of the potential savings. Assume you earn $100,000 per year net of all other deductions and make an $18,000 RRSP contribution by the end of February 2020. You have the choice of deducting your contribution for the 2019 tax year or deducting it for the 2020 year (or later, if you really wanted), as you are expecting to sell rental property with $300,000 in unrealized capital gains ($150,000 of which will be taxed) in the near future. Although you will have to wait an extra year to get your refund, here are the potential tax savings you might reap by practicing delayed gratification.

Scenario                      Total Income          RRSP Tax Refund

2019 deduction           $100,000                   $5,958

2020 deduction           $250,000                   $8,964

By waiting a year to apply her RRSP deduction, this investor saved about $3,000. Although she did lose the use of her refund dollars for 365 days, she would have needed to get an after-tax return of over 50% if getting the smaller refund sooner to make it worth her while. This investor would also definitely want to make her regular RRSP contribution in 2020, as she would have earned about $18,000 more in new room based on her 2019 income, as this additional deduction would produce a similar tax refund.

  • Consider Delaying your OAS Pension if Triggering Gains in your Late 60’s. Consider delaying your CPP as well. At this point, if your taxable income exceeds about $76,000 and you are on OAS pension, you will lose fifteen cents per dollar your taxable income exceeds this amount. Since only 50% of capital gains are taxed, think of any capital gain that takes you into the clawback zone as costing you seven and a half cents instead. Actually, it will cost you less than that as well, since you would have had to pay tax on those lost pennies and dollars in OAS pension anyway. Since you can control when you start your government pensions and are rewarded for waiting by getting an increased pension, consider delaying at least your OAS pension if you are planning on triggering a big capital gain in your late 60’s until the year after the dust has settled. This gain may have cost you your entire OAS pension for the year of sale anyway, so you really haven’t lost anything by waiting, although still get a larger pension for life. To me, it’s like trading in a kale salad for a chocolate brownie or swapping something that I won’t touch anyway for something even better down the road.
  • Consider Claiming a Capital Gains Reserve When Selling Real Estate. It’s a lot easier to spread out the capital gains hit when selling RBC shares rather than a studio apartment on Howe Street. On the other hand, there is a special rule that applies if you don’t receive your real estate or business sales proceeds in single year. In fact, if you defer enough of your gain, you can spread the tax hit out over up to 5 years. It usually means taking back a mortgage when you sell, which is admittedly something that doesn’t work for a lot of us. If selling in December, at least consider structuring the deal so that the gain is spread over 2 years rather than just one by delaying payment of part of your sales proceeds until January. If you and a spouse own real estate jointly and you don’t plan on selling for a few years, it might even be possible use this strategy between spouses before selling to an outsider. One spouse sells his interest to the other but gets paid (and taxed) over the next 5 years in 20% increments, charging his spouse interest at the minimum allowable rate during the interim. Although the buying spouse still has to pay tax on her gain plus the increase in value on the portion she acquired from her husband, the total tax bill might still be a lot less than if the selling spouse had to also include his part of the gain in a single tax year.  This is another strategy to discuss with a tax or planning pro in advance, as there are a few moving parts involved.


Hopefully, some of the ideas described in this article have provided you with plenty of food for thought. If so, stay tuned until next time when I serve up the final course.

A Stand Against Capital Punishment – Ways to Minimize Your Capital Gains Tax Bill Part 1 – Basic Principles


When the rubber hits the road and it’s time to sell your investments, all that really matters is what you have left after tipping the tax man, regardless of whether your goal is to fund a once-in-a-lifetime trip, buy your first home or merely pay for groceries. After all the hard work of saving in the first place, managing your investments and minimizing excess fees along the way, failing to do proper tax planning is like forgetting to serve whip cream with pumpkin pie – not a disaster, but still enough of a setback to cause some mild discontent and feelings of what could have been.  Adding sound tax planning on top of a great investment strategy is the icing on the cake that can make a big difference to your after-tax rate of return. This is part 1 in a three part series designed to do just that. Today’s offering focused on the basic principles you’ll need to know when doing capital gains planning. As always, all calculations use B.C. tax rates from the current year (2019).

The Basics

At the risk of stretching my food analogies to the breaking point, some of these ideas may not be a piece of cake to understand but putting in the time now might one day save you a lot of bread. To begin, it’s important to understand exactly how capital gains are taxed. The basics are as follows:

  • Only 50% of your total gain, net of expenses is added to your taxable income. This usually means paying at least half as much tax per dollar of capital gain compared to interest dollars. This is also true when investing inside a company.
  • Since only 50% of your total net gain is added to the mix, this means that you can earn a lot more capital gains in a set tax bracket before getting pushed into higher brackets. For example, assume an investor earns $50,000 in either interest, eligible dividends, or capital gains and $60,000 in net income from all other sources. Only 50% of the capital gains are taxed but eligible dividends are “grossed up” by 138% of their actual payment. Thus, the following chart shows how this hypothetical fifty grand will show up on your tax return for calculating your tax bill and what your total taxable income and marginal tax rate would be when this money is added to $60,000 in other income.                      

Type of Income       Taxable Amount      Total Income             Marginal Tax Rate*

Interest                     $50,000                       $110,000                     38.29%

Eligible Dividends  $64,000                       $124, 000                    40.7%

Cap Gains                 $25,000                       $85,000                       31.0%

*This column lists the combined Federal and B.C. tax bracket that this taxpayer would inhabit on his last dollar of total income. It DOES NOT show the actual tax rate (s)he would pay on that dollar if it was dividends or capital gains, even though it does provide this information for interest. For capital gains, (s)he would pay 15.5% on that last dollar and for eligible dividends, (s) he would pay 18.88%, ignoring any OAS clawback.

  • Capital gains are only taxed when the investment is realized or sold, unlike interest or dividends, which are taxed yearly upon receipt. That means that more of your money is left to compound most of the time when compared to other sources of taxable income, except if receiving dividends in the lower tax brackets, where the payments may be free or even better. Of course, as Moneysaver readers know so well, these dividend payments generally go along with investments that are also realizing capital gains anyway, which is like ordering a pie and getting the ice cream on the side for free.
  • You can often control when your capital gains bill is triggered, such as when selling rental property or those Tim Horton’s shares you’ve been sitting on for years. That means triggering your gains strategically can reduce how much tax you pay on your capital gain. For example, assume you have the choice of selling your rental property, which has an unrealized capital gain of $400,000 on December 31stin a year where you’re earning $110,000 in other income and one day later, after you’ve retired and expect to earn only $30,000 that year from other sources. Here is what your tax bill on the gains looks like in both scenarios:

Sale Date     Total Cap Gain      Taxed Gain     Total Income   Tax on Gain                                                                                                                  

Dec 31            $400,000                   $200,000           $310,000            $93,449

Jan 1               $400,000                   $200,000           $230,000            $76,956

But what if this investor owned the property jointly with their spouse who was also making $30,000 and they both sold on Jan 1? In that case, their combined tax bill plummeted to $62,802!

  • You can apply 50% of any capital losses you’ve realized in the past but not yet written off against gains you realize that year. If realizing any losses this year, after offsetting them against that year’s gains, you can carry them back against gains you’ve earned in the 3 prior years or carry them forward indefinitely to use against future gains or against other income if any are still on the books at your death.
  • When selling only some of a fund or individual stock in a non-registered account, while hanging onto some until later, the tax bill gets calculated by averaging all of your purchases of that asset so that you are taxed proportionately, rather than looking at each sale or purchase individually. Thus, if you sell 40% of your shares in a restaurant fund in your non-registered account, you would include 40% of the total gain of all the shares you own, regardless of when you purchased them.
  • Capital gains inside your RRSP and RRIF are like all your other RRSP and RRIF investments – taxed as income only upon withdrawal or death. Capital gains inside your TFSA are tax-free in all instances, just like any other type of income earned inside that account. That means there are no special rules for capital gains in these instances. If transferring shares you own in your non-registered account to a registered account, you trigger capital gains at that time as if you’d sold the shares instead. It is often a bad idea to transfer shares with losses to these accounts in kind, as you won’t get credit for the capital loss. Instead, consider selling the assets and either waiting 31 days to repurchase them in your registered account (or your spouse’s name or so on) or buy a similar but not identical investment inside your registered accounts if the capital loss is large enough. I talk more about this more in my later articles when discussing the “superficial loss rules.”


Today’s article is merely the appetizer for the far more sumptuous main course where you can put some of these principles into action.