# Interesting Capital Gains Tax question....



## familyman (Apr 6, 2015)

Ok folks, so here is one for the more knowledgeable. If someone is not currently working, but makes 1 million dollars in the stock market in a non-registered account and wants to withdraw it in a year that he is not working, does he still pay capital gains tax? 

I know you don't get taxed on 50% and the other 50% is taxed based on your highest tax bracket, BUT, if he isn't working, his tax bracket is zero, and therefore his capital gains tax would be zero. Is this correct or am I missing something?


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## houska (Feb 6, 2010)

You are indeed missing something. The tax bracket is determined by *total* taxable income, not *employment* income. So in your hypothetical scenario, Mr. Lucky realizes a $1M taxable gain, which gets included in his taxable income at the (current) 50% inclusion rate. Absent other income, his taxable income is therefore $500k, putting him solidly in the highest tax bracket.


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## Just a Guy (Mar 27, 2012)

If he were married, and his wife also didn't work, there may also be a way to income split the gains, meaning both of you each are taxed on $250k of income, not sure if that saves much more, but it could.


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## AltaRed (Jun 8, 2009)

Just a Guy said:


> If he were married, and his wife also didn't work, there may also be a way to income split the gains, meaning both of you each are taxed on $250k of income, not sure if that saves much more, but it could.


Not unless the spouse owned 50% of the assets to begin with (on which the gain was based). Attribution of income is proportional to ownership of the underlying assets.


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## sags (May 15, 2010)

The word is the next budget may reduce non taxable capital gains to less than 50%, but may provide a life time capital gains exemption amount. We shall see..........


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## AltaRed (Jun 8, 2009)

sags said:


> The word is the next budget may reduce non taxable capital gains to less than 50%, but may provide a life time capital gains exemption amount. We shall see..........


I think you mean... to raise the inclusion rate to higher than 50% to make effective cap gains tax rate higher than it currently is. An easy way for the Libs to make the 'rich' pay more. 

I think if that happens, they will grandfather unrealized gains to date just like they did on Feb 22, 1994....with maybe a cap, but perhaps not. Not imposing a cap on that reduces the howling.


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## familyman (Apr 6, 2015)

houska said:


> You are indeed missing something. The tax bracket is determined by *total* taxable income, not *employment* income. So in your hypothetical scenario, Mr. Lucky realizes a $1M taxable gain, which gets included in his taxable income at the (current) 50% inclusion rate. Absent other income, his taxable income is therefore $500k, putting him solidly in the highest tax bracket.


Ok so according to this updated website, could you please tell me how much that would be? 33%? or more?
http://www.taxtips.ca/taxrates/canada.htm


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## bgc_fan (Apr 5, 2009)

familyman said:


> Ok so according to this updated website, could you please tell me how much that would be? 33%? or more?
> http://www.taxtips.ca/taxrates/canada.htm


Why not just use the linked tax calculator from that website? 

It gives the calculation as $143,296 for 2017 federal taxes.

The fact of the matter is that we have federal tax rate brackets. So on the first $45916 of eligible income, you are paying 15% (total of $6887.40), for the next bracket, you are paying 20.5% (total of $9412.57) and so on. It is only with the remaining eligible income at the highest tax bracket that you pay 33% (i.e. $500000 - $202800 - personal exemption). So roughly $280k is being taxed at 33%.

Does that clarify things? 

I am curious about your phrasing of "makes 1 million dollars in the stock market in a non-registered account and wants to withdraw it in a year that he is not working". I am assuming that he is liquidating his assets and he assumes that he has $1M in capital gains, and NOT his stock portfolio is worth $1M? Those are slightly different things.


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## Davis (Nov 11, 2014)

For an unregistered account, tax is paid capital gains in the year you sell the stock, regardless of whether you withdraw the money from the account or not. So you sell the stock, earn a $1 million capital gain: $500,000 would be included in your taxable income for that year, regardless of whether you take the $1 million out of the account or whether you reinvest it. 

RRSPs and TFSAs are different. You do not pay any tax when you sell shares in either of those accounts. For the RRSP, you pay tax on any amount you withdraw from the account. For a TFSA, you don't pay tax either when you earn the income or when you withdraw it.


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## AltaRed (Jun 8, 2009)

^ Davis, I agree with your clarity, but ISTM the OP is using 'terms' loosely and doesn't appear to understand (at any level) how the tax system works. The suggestion for him to use the taxtips calculator for 'what if' analysis is spot on....though the OP does have to understand some basics to plug the right data into it in the first place!!!


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## familyman (Apr 6, 2015)

AltaRed said:


> ^ Davis, I agree with your clarity, but ISTM the OP is using 'terms' loosely and doesn't appear to understand (at any level) how the tax system works. The suggestion for him to use the taxtips calculator for 'what if' analysis is spot on....though the OP does have to understand some basics to plug the right data into it in the first place!!!


Appreciate all the answers from you guys, and I am well aware of the different tax brackets and how you get charged different percentages on different amounts, but just didn't have the time to fully elaborate my question.

And I know all about the differences between TFSA's, RRSP's, non-registered accounts and the rules that come with each of them. The one piece of information I didn't know that you guys helped me understand is, I thought the last 50% of the realized capital gains would be entirely taxed at a flat rate at the highest tax bracket. 

But from the way you guys explained it here, the realized capital gains (aka when you actually sell the stock), will just be treated as regular income and will be taxed according to the regular tax brackets, so NOT a flat 33% across the entire amount, but 15% on the first $45916 and so on and so forth.

...or did I misunderstand that?


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## familyman (Apr 6, 2015)

bgc_fan said:


> I am curious about your phrasing of "makes 1 million dollars in the stock market in a non-registered account and wants to withdraw it in a year that he is not working". I am assuming that he is liquidating his assets and he assumes that he has $1M in capital gains, and NOT his stock portfolio is worth $1M? Those are slightly different things.


Yes you are, I was referring to the realized capital gains, after liquidating his assets - basically the amount a person made after selling his stocks not including his own investment in the stock.


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## Just a Guy (Mar 27, 2012)

Basically, you need to realize that income tax is paid on income. Any money you receive is considered income. The way that income is taxed varied depending on ow you made each type of income (paycheque, dividends, capital gains, etc), but you still need to pool all the money together and classify it as your total income.


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## Spudd (Oct 11, 2011)

familyman said:


> But from the way you guys explained it here, the realized capital gains (aka when you actually sell the stock), will just be treated as regular income and will be taxed according to the regular tax brackets, so NOT a flat 33% across the entire amount, but 15% on the first $45916 and so on and so forth.
> 
> ...or did I misunderstand that?


You got it!


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## AltaRed (Jun 8, 2009)

familyman said:


> ...or did I misunderstand that?


An awkward explanation to me, so let me try this.... 

Capital gains, i.e. the difference between the cost basis of what was paid for the stock and what it was sold for is the actual capital gains... and is entered on Schedule 3 of a tax return. At the bottom of Schedule 3, the actual cap gains is divided by 2 (because of 50% inclusion rate) and the result is then considered Taxable Income, subject to the usual Federal and Provincial tax brackets as explained above, e.g. 15% on the first $45916 of taxable income, and so on (plus of course the provincial amount too).

Use the taxtips calculator to get your actual number.... or download something like the free Studio Tax software package and run the numbers yourself.


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## familyman (Apr 6, 2015)

You explained it better, but this is pretty much what I understood as well. 

Now, onto making that 1 million!


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## Eclectic12 (Oct 20, 2010)

sags said:


> The word is the next budget may reduce non taxable capital gains to less than 50%, but may provide a life time capital gains exemption amount. We shall see..........


You mean like the word that it would be changed in the last budget?

The possibility being raised ...
http://business.financialpost.com/p...e-on-the-table-in-the-march-22-federal-budget

The confirmation it wasn't part of the 2016 budget ...
http://www.advisor.ca/tax/tax-news/liberals-decide-fate-of-capital-gains-tax-202984


Time will tell .... though I know of people who avoided putting money into RRSPs because the gov't was going to take the RRSP away "any day now". 


Cheers


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## Eclectic12 (Oct 20, 2010)

familyman said:


> You explained it better, but this is pretty much what I understood as well.
> 
> Now, onto making that 1 million!


Hmmm ... does this mean you are trying to learn before investing?

It is commendable ... though it might be a faster process to read the chapter on taxes in a beginner's book on investing versus taking a piecemeal approach.


Cheers


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## familyman (Apr 6, 2015)

Thanks Eclectic12, but not quite trying to learn before investing. I started my journey 2 years ago and have traded a fair amount since then, almost entirely in my TFSA so I didn't worry about taxes. But with some really hot stocks that I can only buy only in non-registered accounts that have the potential for huge returns, I just wanted to get a heads up about the taxes....


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## Eclectic12 (Oct 20, 2010)

The heads up is important ... not being aware of what info to collect for a specific investment (a REIT) as well as some buyouts that removed the needed info from being easily retrieved caused me a headache when I sold years later. After adjusting my info collection and spreadsheet, it is tedious but easy.

Based on how you asked, the way I read most of the responses - the focus is on capital gains when selling. Keep in mind there may be yearly income to pay income taxes on as well. 

Buy a stock that does not pay income (ex. Africa Oil Corp) then only the capital gains when selling some or all of the stock need to be reported. Buy a stock that pays 100% eligible dividends then even with no sale of stock, yearly one has to report the dividends to pay taxes on the income paid (the dividend tax credit makes the tax rate much better than employment income).

One has to check the status as I have bought stock that did not pay income at all that about eight years later then started paying eligible dividends.

One of the more difficult types are where mixed types of income are paid (ex. a REIT). Each year the amounts are identified. Some income may be taxed the same as employment income, some that are eligible dividends may be taxed at a better rate and some may be deferred or tax immediately as a capital gain (among the best tax rates).

The other difficult type is probably not what you are buying but in case you do, a Canadian domiciled ETF can pay non-cash distributions that are re-invested. It may not be easy to find the amounts to add to your cost base (missing this means paying extra capital gains taxes).


I mention this not to scare you off but to make sure you are aware there's a range of tax implications to be aware of. I suspect you are likely buying stocks that pay no income or pay dividends ... which if true means you have lots of time to learn at your pace about the more complicated types.


Cheers


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## Spudd (Oct 11, 2011)

familyman said:


> But with some really hot stocks that I can only buy only in non-registered accounts that have the potential for huge returns, I just wanted to get a heads up about the taxes....


This seems like a great way to lose money.... how did you find out about these "really hot stocks"? And why can't they be purchased in regular accounts?


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## humble_pie (Jun 7, 2009)

familyman said:


> But with some really hot stocks that I can only buy only in non-registered accounts that have the potential for huge returns, I just wanted to get a heads up about the taxes....




it's too bad that folks on here have spilled the beans, let the cat out of the bag & given you excellent tax advice worth $200 per hour, all for free.

a better way to go could have been: Tell us the names of the sure-fire hot stocks that have potential for huge returns. Then if we like the names we might let on a thing or two.


.


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## familyman (Apr 6, 2015)

humble_pie said:


> it's too bad that folks on here have spilled the beans, let the cat out of the bag & given you excellent tax advice worth $200 per hour, all for free.
> 
> a better way to go could have been: Tell us the names of the sure-fire hot stocks that have potential for huge returns. Then if we like the names we might let on a thing or two.
> 
> ...


Humble-pie my dear momma-bear. You've scolded me before, when I started out as an investor 2 years ago and didn't know what I was talking about, and perhaps I deserved it. But a person I respect once told me - a wise man can learn even from an ant.

So let me be that ant today. I will tell you the stock I'm talking about. You've already scolded somebody that was investing in a similar company. You are free to do the same with me. But please don't keep checking out the ticker that I'm about to tell you about if you don't invest in it. You may kick yourself for years to come.

The market? The Cannabis industry. More specifically, the biopharmaceutical cannabis industry. The ticker. OWCP. One World Cannabis. An Israeli-based company with a very strong executive team that is about to launch their first product, a psoriasis cream. This stock used to be .003 cents about 6-9 months ago. It is currently trading at $2.10 as of today. A $10K investment 6 months about would have made you a millionaire. Is this a silly pump and dump? Please check out the following links, and you decide:

http://www.owcpharma.com/newsroom-photos/. <-----specifically look at the 8 minute long video
http://www.topcannabisstock.com/index.php/our-top-cannabis-stock/ <--------looks kinda pump and dumpy, but I know the guy that owns this website and believe me, it's legit

This stock went up 129% today. It is STILL about 1/3 of it's value based on just the release of their first product which will start selling in April of this year. The myeloma treatment that they're developing treated 100% of cancer in 60% of mice. These are only 2 patents out of the 8 they currently have.

2 other companies that are similar to OWCP: Axim Pharmaceutical (AXIM) released a product and went up from 30 cents in October, to approx. $11 now. You do the math. 100K in one month would have made you a multimillionaire.

Cannabics (CNBX), recently released their first product. In the last 3 weeks it's gone up from 95 cents to $6.50 today......in 3 WEEKS!

Is this another dot com bubble just waiting to burst? NO. What makes it different? These are companies with real products selling and making money - the dot com bubble was stupid in the sense that people didn't know what the companies were, or their products, or if there was even a market for those products, they just invested blindly.

Please watch the following video and you tell me if there isn't a market for the cannabis industry:
https://www.youtube.com/watch?v=uDDGqrY8-VI

If you're going to invest in OWCP humble_pie, you must do it within the next WEEK!!!! March first they are presenting at a huge Wall Street conference, with lots of big rich investors and this will be $5 by then. Efficacy results for their psoriasis cream is expected in March (half-way through the study, they said the results were extremely encouraging and they're expanding the study to see what other things it's good for). Once the efficacy results come in, expect a 50%-100% increase in the share price. Also, this company was just incorporated into the first marijuana ETF. People will be able to buy it in their TFSA's in the next 3 months or so (currently you can't trade it in a registered account). This will also give it a boost.

There's someone I know that made 1.25 million dollars just TODAY on this stock! Another invested 18K a few months ago and has made 500K. Personally I made 150K Canadian today on this stock. I started the year with 100K. I am currently at 250K. I expect to triple and quadruple my net worth in 1 months time - after the conference and efficacy results. If this stock goes up to $10/share, I become a millionaire.

There you have it humble_pie. You are smarted than me, and much more experienced and wise, and I've learned a lot from you, but please allow a fresh mind to get you to look at something more than the simple blue chips - you may one day thank me!


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## OnlyMyOpinion (Sep 1, 2013)

"A fresh mind"? Posting garbage in this fashion - 3 times - shows NO mind. Take that short hike familman.


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## familyman (Apr 6, 2015)

I apologize then . I guess like any other human, when you find something good, you can't help but to want to tell everybody - especially people that have helped you before and some of whom you really respect. Please ignore all my posts then, and also ignore the OWCP ticker from now on. It's a pump and dump after all, right?


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