The markets have been good for many investors this year, so what should you do if you have a large capital gain on an investment in a non-registered account? Kim Parlee talks to Georgia Swan, a Tax and Estate Planner with TD Wealth, on three methods to manage any potential capital gains tax hit.
The question today is, I have a big, unrealized capital gain in my Non-Registered Investment Account. What should I do about the capital gains tax? And I'm just going to start with, Georgia, let's just maybe pin ourselves on, what is an unrealized capital gain?
- Well basically, a capital gain, you realize it when you actually sell the share. So an unrealized capital gain is it's just-- the investment or the securities are just sitting there. You own them. And you're watching them go up in value. So that's a really nice problem to have.
I think the issue for someone like this is that you shouldn't be planning around one small event. I mean, tax planning is something that happens over a lifetime. You take opportunities as they come to you. So as I said, while this is a nice problem to have, you have to have a much more holistic view of when the time is right to take advantage of some of the strategies available to you.
- What are some of the strategies? I know you've got three you want to outline here.
- Yeah, well the first one-- and I think the one that sort of most people are familiar with-- is actually called tax loss selling. And the idea is that capital losses-- so when you have a security, for example, that's in a loss position, that's lost money from when you bought it, if you sell that security at a loss, you can take that loss and apply it against capital gains either three years back, or you can carry it forward indefinitely.
So the idea is that if you do have any investments that are in a loss position, you can actually sell those, trigger that loss to apply it against other capital gains that you have. Now, what most people say to me is that I've got a really good investment advisor, or I'm pretty good at this. And I don't have a lot of securities that are ever in a loss position. I mean after all, that's the goal, not to be in a loss position.
So I understand that. But there's actually another way you can look at tax loss selling that we're going to discuss a little bit later. But where you can find it, that's the first one you should be looking at.
- OK, second one is something about charitable donations. So tell me about how that plays into a capital gains discussion.
- Yeah, well that's actually a really good one. And a lot of people don't know about it. So I'm glad to bring it to you.
So let's say, for example, you want to give $1,000 to your favorite charity and you have some investments and you say, OK, well, I want to give $1,000. So you sell off an investment and you take the cash and you donate it to your charity. What happens in that case, because you've sold off the investment-- and hopefully it's in a gain position-- is you trigger the capital gain. You have to declare the capital gain. And then yes, you get the charitable donation credit, but you've also realized income in that year.
But if you actually donate that security in-kind-- so basically, you have shares in ABC Corp, and you donate that-- those shares themselves, so I donate my shares in ABC Corp to my favorite charity-- what happens then is actually the capital gain is set at 0. You actually don't have to declare the capital gain. And yet you still get the donation tax credit. So in this case, you don't have the corresponding income inclusion. But you still get that, for example-- in the example I used, that $1,000 charitable donation credit. So that's a great way of donating shares or making that donation to your favorite charity.
- Yeah, and there's a lot of charities that need it right now, too. OK, the third option, I understand, is a little more sophisticated. What is this one?
- Yeah, it's a little bit more sophisticated, and for some people, it's a little scarier. So the issue is that, as I say quite often, tax planning needs to be a lifelong sort of endeavor. And you should be looking for opportunities over and over throughout the years, and not sort of just looking at this problem at the end of every year and saying, what happened to me this year? And how can I alleviate tax?
So in my career-- which shows you how long I've been doing this-- there's been probably three major historical events that have caused significant downfalls in the market. I mean, we just went through one in 2020, of course. And the idea is to look at those historical events as opportunities. In my first example, I said most people would say, well, I've got a good investment advisor. And I don't usually have shares in a loss position. But with these historical events, a lot of times we find opportunities where all of a sudden-- and I want to say, artificially-- you may have some securities that are in a lost position in that time.
So take advantage of these events. Don't be afraid of them, because invariably, the stock market has always come back. And if you can find those opportunities when they arise and then do your sales at a loss, you'll be able to apply them against the gains.
The other thing to look at is your individual income situation on a year over year basis. I mean, if you're an employee or you have pretty stable income, this isn't as easy. But if you're, for example, a sole proprietor, a business owner, or someone who receives income from rents, and you have a down year-- rents aren't as good or your business is not doing as well-- then that might be an opportunity to trigger gains because the taxation will be based on your overall income. You can trigger gains in that year and, ergo, pay tax maybe at a lower rate. It's usually not good to wait to trigger these gains in a year where, all of a sudden, you've got quite a bit of income.
So those are some of the things that you should look at over the course of a lifetime. Look for those opportunities. Look for what's going on in your other income. And try to take advantage of the opportunities when they come.
- Great strategies, three different ones for people to look at. And everyone who's watching, keep in mind as well, if those gains happen inside an RRSP or TFSA, they don't need to worry. Those ones are sheltered to begin with. And also, people need to keep in mind that this is all individual strategy. So one piece of advice does not fit everyone. Georgia, thanks very much.
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