Dealing with Capital Gains

[dzerykdm]

Hi,

Recently my husband and I sold a couple of investment properties and we now have a capital gain of about $160,000. Our accountant has advised us to put a big chunk (like $70,000) into RRSP`s as a tax shelter for the capital gain, but my question is as a real estate investor is this our best option?

What I`d like to know is what other REIN members do to protect their capital gains or do you just roll with the flow and pay your taxes comes the end of the year?

 

[TomRebstock]

Many investors acquire property and have the ownership within a corporation. there are some methods to reduce your tax bill considerably.

I bought my firat four and hold them in my name. With my latest I now own as a corporation (I went with a numbered Corp, quick).

There are costs to form a corporation (approx. 1,000) and you have to have a separate tax return.

Talk to a qualifies accountant.


Hi,

Recently my husband and I sold a couple of investment properties and we now have a capital gain of about $160,000. Our accountant has advised us to put a big chunk (like $70,000) into RRSP`s as a tax shelter for the capital gain, but my question is as a real estate investor is this our best option?

What I`d like to know is what other REIN members do to protect their capital gains or do you just roll with the flow and pay your taxes comes the end of the year?

 

[GarthChapman]

I don`t think you can put 70K into an RRSP to shelter the Capital Gains income from Tax. As I understand it the Capital Gain income is not involved in the calculation to determine your eligible RRSP contribution for the year (it is calculated on `earned income`) - AND - you are capped at something under 20k per year on RRSP contributions in any event.

CRA only taxes half of the Capital Gain, so run the numbers and see what the cost of the tax is. You may be surprised at how low it is.

In our case (we are incorporated) the tax rate on the half that is taxed is 22.89% (the final rate once the money flows to us personally) and then the non-taxed half comes out to us personally without any tax as a Capital Dividend, and then all this ends up creating more tax credits that mean we won`t be paying any tax for a few years. What a great countrym and a great business!

 

[ohsofrugal]

The tax you pay on capital gains is 50% of the gains X your marginal tax rate. A 70k contribution to your RRSP would reduce your income and likely bump you into a lower tax bracket (thus reducing your marginal tax rate). You would end up paying less taxes by making that RRSP contribution if that is indeed the case.

You`re not capped at 20k for your contribution either because the rrsp deduction limit is based on your unused rrsp room as well. You can confirm with CRA exactly how much you can put in your rrsp if you want to be certain but likely if your accountant gave you this information and you`ve dealt with him before, he may have done so already.

I`m guessing it is too late to form a corporation and reap the tax benefits as it seems you have disposed of the property already. Maybe something to consider for the future though. Conversely, if you have some investments that have been beat up by the market, you could also sell those at a capital loss and use that to reduce your capital gains.