The phrase “capital gains” is one that should be understood thoroughly.

In broad terms, “capital gains” are any profits realized from the sale of assets that are capital property (for example, property not held for the purpose of resale). If you buy shares, bonds, mortgages, or other property and sell them at a profit, there is usually a capital gain.

Currently, one-half of the resulting capital gains on a disposition are taxable. However, individuals and corporations who donate securities listed on prescribed stock exchanges, mutual funds and segregated funds of life insurance companies to charities (other than private foundations) do not have to include any portion of the resulting capital gains in their income.  This treatment has been extended to gifts of such property to qualified private foundations where the gifts are made on or after March 19, 2007.

Capital gains of up to $500,000 ($750,000 for dispositions on or after March 19, 2007) on certain private Canadian corporation shares, certain farm properties, and certain fishing properties may be eligible for a lifetime cumulative exemption from tax. In addition, the gain on an investment in certain private Canadian corporations may be deferred if the proceeds are reinvested in another eligible corporation within a specified time. If you are planning to sell such shares, farm property, or fishing property, seek the advice of a Chartered Accountant. It may save you some taxes.

Given this favourable treatment, it may be more tax effective to hold properties that will yield capital gains outside of your RRSP, and other assets (such as interest-bearing securities) inside your RRSP. Contact a Chartered Accountant to help you revise your tax planning strategies to take advantage of the generally lower tax rates for capital gains.

Information for Tax Tips is provided as a public service by the Chartered Accountants of British Columbia.