Should you sell stocks to simplify with an all-in-one ETF?

Selling stocks in tax-preferred accounts

When you sell stocks in a tax-free savings account (TFSA), there are no tax implications, Brad. There is no tax to sell a stock for a profit, nor tax savings to sell a stock for a loss.

There is no tax to withdraw from a TFSA, either. The only tax that may apply within a TFSA is withholding tax on non-Canadian dividends earned, ranging from 15% to 25%. This withholding tax happens at the source, either before the dividends are earned by a mutual fund or an ETF, or, for a stock, by the brokerage before the dividend is credited to your account.

U.S. withholding tax does not apply to U.S. dividends earned directly in a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or other similar retirement accounts. The “earned directly” reference means that the U.S. stocks are owned directly by you and trade on a U.S. stock exchange. A U.S. dividend earned indirectly from a stock owned by a Canadian mutual fund or ETF will have withholding tax before the fund receives the net income.

Stock sales within an RRSP or a RRIF are also free from tax implications, Brad, so there is no tax to sell for a profit nor tax savings from selling at a loss. RRSP and RRIF withdrawals are generally considered taxable income. There are exceptions for eligible Home Buyers’ Plan (HBP) withdrawals for a first home purchase and Lifelong Learning Plan (LLP) withdrawals for eligible post-secondary education funding. 

Selling stocks in taxable accounts

Non-registered personal accounts and corporate investment accounts are considered taxable investment accounts. This means the income earned from owning investments, as well as the profit or loss resulting from selling them, are relevant.

Non-registered personal accounts

When you sell a stock in a non-registered account, one-half of the capital gain is considered taxable income. Personal tax rates range from about 20% to over 50%, with higher tax rates applying at higher levels of income. Rates vary by province or territory of residence. So, the tax payable on the total capital gain is generally 10% to 25% (20% to 50% of the taxable capital gain). 

Corporate investment accounts

When you sell a stock in a corporate investment account, one-half of the capital gain is taxable at around 50%. That means the total tax payable is about 25% of the capital gain. There are no marginal tax rates for a corporation, so the same tax rate applies whether the corporation’s income is $1 or $1 million. There are slight tax rate differences between the provinces and territories.

One-half of a corporate capital gain is added to a corporation’s capital dividend account (CDA). That is a notional account that tracks a balance that can be paid out tax-free to the shareholders. Thirty-one percent of a taxable capital gain is also added to another notional account balance called refundable dividend tax on hand (RDTOH), which can be refunded to a corporation when it pays out taxable dividends to its shareholders.