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You're Going to Pay Taxes on That

calgary money advice estate planning financial planning investing Jun 17, 2024
Peaceful cabin

When you buy an investment and the value of that investment goes up over time, you are going to pay tax on it. There's no way around it. I don’t care if it is a stock, a piece of artwork, shares in your own business, or a 10-unit commercial building, the tax man will cometh, eventually.



There are three notable exceptions to the CRA’s undeniable LUST for their share of your profit. If and when you can, use these three tools to their fullest potential:

  1. TFSA accounts
  2. Your personal residence
  3. Life insurance proceeds

RRSP, RESP, and LIRA accounts still get taxed, but they are helpful in delaying taxes.

This isn’t even the point of this article; let's talk about what happens with your other assets.


Capital Gains Formula

When you sell an investment (building, stock, private shares, etc) in your company or personally, the government taxes you on the gain of the sale. Capital gains are the friendliest of the three ways investments can be taxed - income and dividend being the others - but they are still significant.

Picture this …

Let's say you buy a building for $1,000,000.

Five years later you sell that building for $1,400,000.

There is a taxable gain of $400,000 due in the tax year in which you sell the building.

Half of that gain - $200,000 - is taxable at your marginal tax rate. If we assume the highest tax rate in Alberta, that’s 48%.

You now owe $96,000 at tax time. 


Voluntary vs Involuntary Sale

The above scenario is called a voluntary sale, which means you are alive when this all goes down and that you chose to sell the property, making about $304,000 in profit over five years. High five! 👋🏼

An involuntary sale happens when you die and the government deems your property to have been sold the day before you die, for fair market value.

Now, picture this … 

Let's say you own a building - a cabin or cottage being the most relatable here - don't have a surviving spouse who jointly owns it, and want to pass the cabin on to your kids.

When you die, the tax bill is still due. Shitty, right?

A $96,000 tax bill amongst a few kids is probably manageable; cash in some investments, utilize a HELOC on their own homes - not a huge problem and the cabin stays in the family.


“Grandpa doesn’t like to talk about it”

But what happens if that $96,000 is $960,000?

What if the cottage has been in the family for 45 years and was built by Grandpa with his own two hands for $17,000, and it’s now worth $1.7 million dollars?

You have a future tax problem, folks. The sooner that you (and Grandpa) deal with it, the better. There are solutions that work in these situations: family trusts, estate freezes, and whole life insurance. The sooner you deal with this stuff, the cheaper it is going to be. There is no flux capacitor that can take you back in time.

Talking about death sucks. Talking about taxes sucks. Talking about them both together is downright awful, but it is also what I specialize in.

If you think you might have a tax issue on your hands, give me a call.

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