TAX TIPS: INVESTMENT INCOME, CAPITAL GAINS AND LOSSES IN CANADA
1. Tax rates are significantly more favorable for dividend income than interest income.
2. Defer tax on interest to the following year by investing funds for a one-year term ending in the next calendar year.
3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated in the current year from the mutual fund.
4. Existing holding companies that have built up refundable dividend tax should consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay the personal tax on the dividend. The individual circumstances should be reviewed.
It may be a good time for you to consider whether your investment income is tax efficient and consider investment alternatives.
• Interest income;
• Eligible dividends (generally dividends received from public corporations); or
• Non-eligible dividends (generally dividends received from small business corporations).
Capital Gains and Losses
5. If you own qualified small business corporation (QSBC) shares or qualified farm and fishing property, you may benefit from the lifetime capital gains exemption of $824,176. The exemption is indexed to inflation annually. The government has maintained the exemption of $1,000,000 for qualified farm and fishing property. The exemption is available on dispositions made on or after April 21, 2015.
6. Consider realizing accrued losses on investments to shelter capital gains realized this year and in the previous three years.
Note that a loss realized from the disposition of an investment may be denied if you repurchase the investment within a short period of time.
7. If you have significant trading activity, your sales of securities may be considered a business for income tax purposes.
If your sale of securities is considered a business, your profits will be fully taxable as income (instead of being considered capital gains taxable at 50%), and your losses will be fully deductible against any source of income. If you are concerned about your sales of securities being considered a business, you can consider filing a one-time, non-revocable election with the Canada Revenue Agency. This election will treat all of your gains from dispositions of Canadian securities as capital gains (and all of your losses as capital losses) for the current year and all future years.