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There is a lot of chatter about next week's federal budget including a meaningful change in the taxation of capital gains. Whether or not you believe that there will be an increase to the capital gains inclusion rate should not greatly change your investment strategy. It simply should have been an awareness all along that if you make a profit, some of it will be taxed. If you can reduce, defer or avoid tax on your gains, within the guidelines of the tax laws, of course, then you should. The easiest way to avoid tax on your investments is fully utilizing the Tax-Free Savings Account (TFSA). In this account structure, any and all capital gains, losses and income are totally tax free.

The funds inside a TFSA can be invested in similar ways to an RSP or RIF account. That is, you can buy stocks, bonds, mutual funds, GICs and other investment vehicles. You cannot hold real estate, precious metals (except in certificate form), artwork or other hard assets, such as jewellery. Often people think that they just contribute cash into a TFSA and invest into a high-interest savings account, letting it sit there. If you buy a stock that appreciates, generating a gain, once you sell it there is no tax to pay. Even when you withdraw funds from a TFSA, there isn't any tax.

The TFSA differs from an RSP or RIF, because, despite tax-sheltered growth, they are tax deferral accounts. You still have a taxable event when you withdraw or deregister funds from them. The amount you withdraw is 100 per cent taxable as income, because you got full deduction from income when you initially contributed funds.

With all that said, I certainly think that the TFSA is more important to people of all income levels than the RSP. I have had some instances where middle income earners, who were diligent savers, and had excellent returns in their RSPs, end up with high value RSPs. This good fortune subsequently vaulted them into a higher tax bracket in retirement, when they received their RIF payments, than when they were working. The TFSA avoids that. As well, withdrawals from a TFSA do not cause a possible claw-back of OAS.

You can not only contribute cash into a TFSA, but also securities, in what is referred to as "in-kind." This means that you can contribute shares of a stock, mutual fund or bond that you already own. If it has a capital gain from when you bought it, it has to be declared as such on your tax return. If there is a capital loss, it cannot be deemed as a realized capital loss (to offset against taxable gains). If there is a loss, I would suggest you sell the stock, realize the loss and contribute the proceeds. You cannot buy back that same stock within 30 days or you will be disallowed the capital loss. If you want to realize a capital gain now before the federal budget, in case the inclusion rate is increased, consider transferring "in-kind" into your TFSA, providing you have enough contribution room to do so.

Another strategy is to transfer appreciated securities to a spouse or common-law partner. If the unrealized capital gain has accrued in one spouse's name alone, a planning strategy to transfer the appreciated securities to the other spouse could be considered. Transfers between Mary, for example, and her spouse, John, (where both legal and beneficial ownership are transferred) are generally not taxable for income tax purposes. John will receive the property at Mary's adjusted cost base (ACB).

John and Mary, however, have the option of electing to report the transfer at fair market value. If the assets are in a capital gain position and the election is made, Mary will need to report the capital gain on her income tax return. The deadline to file the election (there is no prescribed form) is the income tax return deadline for the taxation year in which the transfer occurred, generally April 30. The ACB of the property for John will be the fair market value of the assets on the date of the transfer.

If there is a change in the inclusion rate introduced in the budget, Mary may be able to elect to trigger the unrealized gain and be subject to the 50 per cent inclusion rate. If there is no change to the inclusion rate, Mary would not make an election and the security would transfer at cost.

When John earns investment income (loss) and capital gains (losses) from the securities that Mary transferred to him, the income or loss will generally attribute back to Mary. However, there will be no attribution on future investment income if Mary elects to report the transfer at fair market value, trigger gains and also receives fair market value consideration from John.

Before implementing this strategy, Mary and John should seek professional legal advice regarding the potential application of family law and whether this planning strategy would have any effect on their current estate plan. In addition, Mary and John should consult with their qualified tax adviser to determine tax consequences for a potential transfer, including whether there are any U.S. tax or estate planning considerations.

This strategy allows the appropriate decision on whether or not to declare the capital gain as a disposition after knowing the facts from the budget.

As always, what is decreed in the budget announcement always has to be passed into law by parliament and as tax payers, we can only guess at what will be declared.

Nancy Woods is a Portfolio Manager and investment adviser with RBC Dominion Securities Inc. Sections of this column were excerpted from an article from RBC Wealth Management.