But Randy didn’t want to keep the house. Happy with his current home, Randy wanted to sell the lottery win and keep the money. But he was worried: If he sold the new home would he have to pay tax on the capital gains?

According to the CRA, Randy’s not required to pay tax on his lottery gain — in this case a custom home valued at $1 million. (Click here to read the full answer). If, however, Randy sells the home at an appreciated value, he’ll have to pay tax on the capital gains. That’s because we taxpayers only get an exemption from capital gains taxes when it comes to our principal residence, explains James Gustafson, a certified accountant based out of Victoria, B.C.  All other property — whether it’s an investment property or a lottery win — is subject to tax, at our marginal rate.

So, does that mean Randy would have to pay $311,500 in tax when he sold the home for $1 million (assuming an annual income of $55,000 and a tax marginal rate of 31.15%)?

“No. The original win is not considered income,” explains Gustafson, “and for that reason is tax free.” That means Randy could sell the home for $1 million — the market value of the asset when he took possession of the home — and incur no tax.

But if Randy opted to sell the home for $1.1 million, he would have to pay capital gains tax on the difference between the market value of the win (which is $1 million) and the selling price of $1.1 million. In this case, Randy would pay $7,790 in taxes on the $50,000 taxable capital gain (his marginal rate applied to half the total capital gains, as stipulated by the tax man). For a good tax calculator go to the Ernst & Young site.

“Taxes would be fairly minimal, even if he did sell the home at an appreciated price,” says Gustafson.

Not bad for a $100 ticket.

When you sell property that’s not your primary residence, a taxable capital gain is triggered, which can erode any potential profit from the sale of the land. Enter the eco-sensitive, philanthropic land donation.

According to the federal government, an eco-gift is any land donation that preserves and protects the Canadian landscape—and this can range, dramatically, from wetlands, shores and boreal forests to prairie grasslands and rocky cliffs.

But before you get too excited just know: this process can be time consuming. You’ll need to dedicate six to nine months to complete all the steps—and you may need the help of a few professionals, such as a financial adviser or lawyer, although many charities involved with this type of donation now provide help to the donor from their in-house experts.

So, it is worth it?

Yes, if you’re patient, persistent and want to avoid taxable capital gains.

For instance, if you want to sell a piece of land you bought for $5,000 a few decades ago (your intent was to build a house and retire, but you’ve decided the rural life is not for you) then you may be faced with paying tax on the appreciation of that land. Now, if that piece of land was located just outside a major metropolis that’s grown significantly over the last few decades, you may be faced with having to pay taxes on a big profit. For this example, we’ll assume that land appreciated to $100,000—you’d have to pay $23,750 in taxes! (That’s 25% on the $95,000 profit.)

Donate that land and you’ll receive a tax credit. If the land is deemed eco-sensitive you’ll receive an even bigger tax credit—typically 16% to 20% of the actual value of the donation. For the example above, that’s a credit of at least $15,200.  (Also, talk to your accountant as regular charitable contribution credits may only be applied to up to 75% of your net income, but ecologically sensitive donations may be applied to 100% of your annual income.)

But remember, these tax credits can only be applied to the income you earned in the year the eco-donation was made. Also, talk to the charitable organization to determine what costs, if any, they can cover. Many of these organizations will pay all legal bills, surveys and other expenses associated with land donation. If the organization is unable to provide these services, then consider a cash donation to the charity along with the land donation. The charity can use the cash for all the professional services required to complete the donation and you get a credit for both the cash and land donation.

You can also donate the stewardship of your primary residence property, if located in an ecologically sensitive area, but be aware that your property value will probably depreciate—typically by 10%.

There are approximately 160 eligible charities listed in the federal government’s Ecological Gifts program.

Steps for Land Donations

(1) Choose a recognized charitable organization to donate land or land use.
(2) The charity, on your behalf, makes a request for an appraisal of the land to determine if it’s ecologically sensitive.
(3) Talk to the charity (and your adviser) to determine what type of donation would best suit their needs (donation of land in entirety, easement, or covenant).
(4) Pay for the appraisal, survey, land transfer, and ecological study of the land.
(5) Obtain a fair market value evaluation of the land.
(6) Consult professionals, such as lawyers, accountants, and, in some cases, realtors to draw up documents for the donation of the land.
(7) Donate the land and receives two types of charitable tax benefits:

• one for the donation of the fair market value of the land (minus any easements that may devalue the property), and
• the second as recognition for the protection of ecologically sensitive land, under the Federal Government Ecological Gifts program (instituted in 1995).

A good rule to follow is pay your remaining balances on time — there is a 5% penalty in place for stragglers. And, make sure you include all relevant slips and receipts — the Canada Revenue Agency will accept a note with the name and address of the payer in lieu of this. Do these two steps and you’ll see immediate results.

Canadians are also encouraged to look into things like pension splitting, which allows you to take advantage of your partner’s lower rate of taxation, and claiming legal fees in the case of a lost job.

These expenses, which are usually deductible if they were used to earn further income for your business and are deemed reasonable, can include things like taking a client out for dinner – although you can only claim 50% of the bill – plane tickets and home office costs. In addition, workers are allowed to expense $1,500 on supplementary health care coverage for themselves and their spouses, and $750 for each child.

Since there are a number of rules and exceptions involved, experts are pushing self-employed workers to be familiar with all of the legitimate expenses available to them.

What’s the best way to save for your child’s university education? A few weeks ago, I received a letter from a reader who was grappling with just that issue. She was already using a Registered Education Savings Plan (RESP), but she was interested in setting up an in-trust account too and wondered which was better.

The answer depends upon the specifics of your family situation. RESPs are simple and usually mean that you get free money, but there are some cases where the trust can be the better choice.

Why RESPs rock RESPs are a gift from the government, and for most people, they are the best way, hands down, to save for a child’s education. True, you don’t get a tax refund when you contribute to an RESP, but once the money is in your child’s RESP, it grows tax-free until Junior takes it out. To make the deal even better, most middle-class families are eligible for up to $500 in free government money each year that they contribute $2,500 or more to an RESP. Free money is not something you often come across, so grab it when you can.

Thanks to recent changes, RESPs are now more flexible than ever. The 2007 budget raised the lifetime contribution limit to $50,000, and eliminated the annual caps on contributions.

The best RESP strategy, if you have the time and the money, is to put the entire $50,000 into a regular investment account when your child is born. Then transfer $2,500 or more into your child’s RESP each year until all of the money is gone. That way you’ll get the maximum amount of compounding on your contributions, as well as the full $500 a year in free government money.

The trust advantage An in-trust account is a tool that allows you to give your children money for their future, while maintaining control over how the money is invested until the kids turn 18.

These accounts are a great notion if you’ve already invested $50,000 in an RESP and want to contribute even more to your kid’s education. You can use a trust, because they have no maximum.

In-trust accounts also shine if you want your child to get the money whether he or she goes to university or not. Unlike an RESP, these accounts don’t have to be used for education. That means your children could spend their trust money on anything they choose—which could be dangerous, but could also be more fair. Setting up a trust rather than an RESP could mean that you don’t end up giving thousands to an ungrateful son who goes to college and nothing to a daughter who decides to volunteer in Africa instead.

Of course, you could simply save up money for your kids in a regular account, but with trusts you don’t have to pay the taxes on capital gains. By depositing money in the account, you are essentially giving it to your kids (you’re just holding it “in trust”), so they pay the taxes on gains. Your kids will likely have little or no income when they turn 18 and start withdrawing the money, so they usually end up paying little or no tax, says Karen Yull, national tax principal at Grant Thornton LLP in Toronto.

Trusts are complicated so you should probably enlist the help of a lawyer and an accountant to set up yours. To make sure the taxman agrees that your account is really a trust, you should sign an agreement stating that deposits to the account are an irrevocable transfer of property to your child and that you agree to never take the money back or direct what happens to it. You should also make sure that the trustee and the person making the deposits are not the same person. Most families designate one spouse the trustee, and the other makes the deposits.

Finally, you should understand that even if you do all of that right, you generally still have to pay the taxes on dividends, interest or other income from the investments in the account. That means you should choose investments, such as stocks, that will experience most of their growth in the form of capital gains.

Taxes aren’t everything One final word of caution. Tax breaks are important, but never forget that deciding what kind of investment to purchase in the first place is more important.

The woman who wrote me the letter about trusts was worried about how to slash her taxes, but she had money that wasn’t going to be touched for 18 years sitting in a savings account that paid only 2.6%. Since inflation is now running at almost the same rate, there’s a good chance that her education fund will actually shrink over the long haul in real terms. If that happens, taxes are the least of your problems.