I had $358,447 in capital gains in 2022, but paid $0 in tax.

How did I do this? I utilized two capital gains exemption rules in the Canadian tax code.

I sold my personal residence. My portion of the gain was $75,000. I also sold one of my small businesses with a gain of $283,447.

Now, I am not an accountant. Just sharing what I learn. I think everyone should know this stuff. In my opinion, this should be taught in schools. Before you utilize any of these, make sure you run it past a professional first though.

When it comes to the primary residence exemption, there are rules involved, but generally, In Canada, you should end up paying no tax on the sale proceeds of the home you are living in.

Now, In my opinion, one of the most amazing tax exemptions is the Lifetime Capital Gain Exemption (LCGE) when you sell the shares of your business.

In 2023 the exemption limit is $971,190, meaning if you sell your business in Canada, and the “profit” you make on that sale up to that limit, is tax free.

Now, there are a bunch of rules when it comes to taking advantage of the LCGE, so you will definitely need an accountant involved in that. Definitely couldn’t have done that one on my own.

So, in total, my capital gains were around $358k, but since I took advantage of these exemptions, I paid no tax on the gains. I still have around $650k in LCGE left to use if I was to sell my other business.

I have also recently learned about the huge benefits when it comes to owning Canadian dividend paying stocks. The taxes you pay on dividend income from a Canadian public company is very low or sometimes zero depending on your tax bracket.

Let's say there's a person in British Columbia who has $500,000 of equity in their personal residence and sells their small business for $1.5 million, which has a cost basis of $500,000. They'll end up with about $2 million in proceeds from both sales, assuming they don't have any debts to pay off in the business.

Since they'll have a capital gain of $1 million from the small business sale, they can take full advantage of the LCGE and pay just a small amount of tax on the sale. They also won't have to pay any tax on the sale of their personal residence.

If they invest the full $2 million in Canadian dividend-paying stocks with an average dividend yield of 4%, they'll receive $80,000 per year in dividend payments. Based on a simple online tax calculator, they'll pay around $5,500 in tax on that income and net around $75,000. That means they'll earn $6,250 per month after tax without working for it. Average tax rate of 5% on $80k of earnings is 👌.

In 10 years those annual dividends could grow to around $120k per year.

This is all without utilizing any of the tax advantage accounts such as your TFSA or RRSP.

Pretty amazing in my opinion.

I didn't know some of these strategies existed a couple years ago, so again, not a tax expert, just sharing everything I learn as I utilize these great tax strategies.

Original post on my LinkedIn.