1. Buy sheltered investments
This delays taxes due on what you make investing until you withdraw money. It may also reduce your taxable income. If you put money into a Registered Retirement Saving Plan (RRSP), for example, you don’t pay tax on it until you take it back out.
Tip: Your investment earnings will be taxed like interest when you take them out of a sheltered plan. That's one reason why many investment professionals suggest that you hold your interest-earning investments inside an RRSP and investments that pay dividends or have capital gains outside. Then you can take advantage of the lower tax rates on those investments.
2. Use the dividend income exemption
If you have no other sources of income, you may receive up to $66,000 in Canadian dividend income without paying any tax. The exact amount varies, depending on the province you live in.
3. Apply net losses to reduce tax on unsheltered capital gains
At tax time each year, you add up all your gains and losses from buying and selling unsheltered investments. If you come out ahead, then you have a net gain to report. If you lose money overall, you must declare a net loss. A capital loss will reduce the tax you owe.
Tip: You may be able to apply your losses from previous years to offset new gains. This is called carrying forward or carrying back your losses. You can usually apply your net capital losses to gains of the three preceding years or to any future year. Many people get a professional to help them sort out the best approach.
Example: Let’s say you sold two different stocks in 2003. You had a taxable capital gain of $300 and a capital loss of $500. For the 2003 taxation year, you applied $300 of your capital loss to reduce your tax to zero. However, you still have $200 ($500 minus $300) of unapplied capital losses. You can apply that amount against any capital gains you reported in the last three years and get a tax refund. If you wish, you can wait and apply it against taxable gains you make in any future years.