Reducing capital gains with capital losses
If you have capital losses from the current year, or capital losses from previous years that you have not yet deducted, you can claim those unused losses to reduce a capital gain from the current tax year. Capital losses carry forward indefinitely, with no expiration.
You can also strategically trigger capital losses by selling investments at a loss before year-end—a strategy known as tax-loss selling.
Can RRSP contributions reduce capital gains tax?
A contribution to your registered retirement savings plan (RRSP) may help to reduce the potential tax payable as well, Leslie.
When you contribute to an RRSP, you can claim a deduction against your income to the extent that you have available RRSP room. RRSP deductions reduce your taxable income, upon which income tax is calculated. So, to answer your question, Leslie, an RRSP contribution can reduce the tax payable on your capital gain.
However, if your income is relatively low, you may not pay any tax on a capital gain. In Canada, there’s a basic personal amount of $16,129 federally and between $8,744 and $22,323 provincially that makes income below these levels tax-free. Other tax deductions and credits may also reduce tax on a capital gain. The point is that a low-income taxpayer with a capital gain may not pay tax anyway.
Selling assets? Read our capital gains guide
When do RRSP contributions make sense?
As a result, RRSP contributions generally make sense at higher income levels. In fact, the best strategy is to contribute to an RRSP in high-income years and withdraw the money in the future, generally in retirement, when you are in a lower tax bracket.
If your income for the tax year in question, including the capital gain, is lower than your projected future income, you could opt to pay the tax on the capital gain, Leslie. Likewise, if you anticipate a big increase in your income due to a future capital gain, you could decide to delay RRSP contributions until that future year.
Interestingly, you can even contribute to your RRSP and defer the deduction. You must report RRSP contributions in the year they are made (contributions made during the first 60 days of the year are reported on the previous year’s return), but you can elect to defer the deduction to a future year. If you can deduct the amount a year from now and save tax at, say, a 10% higher tax rate than in the current year, that’s a guaranteed 10% after-tax rate of return, which is compelling.
