How Capital Gains Are Taxed in Canada

capital gains tax Canada

The rate of capital gains in tax in Canada has changed several times since it was introduced in 1972.

The Canada Revenue Agency (CRA) imposes capital gains tax on investment gains realized through the sale of certain assets.

The tax base includes profits or losses made by selling investments such as stocks, bonds, mutual funds, and listed securities.

But what exactly does Canada’s capital gains tax system look like? And how would tax rate changes affect your investment?

This article covers everything about capital gains tax in Canada, from how it is calculated and how to deal with it.

What is a Capital Gain?

Capital gain refers to the profit made when an asset is sold for more than its original purchase price. An asset can be anything from stock shares, business or real estate.

Capital gain is achieved when the market value of your investment has increased between the time of its purchase and the time of its sale.

Your capital gain can be either short-term or long-term. Short-term capital gain is the profit made when an investment asset is sold less than one year after purchase.

On the other hand, long-term capital gain results from selling off an asset one year after the purchase date or later.

Whether short-term or long-term capital gains, there are tax charges on all your investment profits in Canada. That’s capital gains tax.

What is Capital Gains Tax?

Capital gains taxes are taxes levied on profits resulting from the sale of capital assets.

This simply means that if you sell any appreciated assets, you have to pay taxes on their appreciated amount.

However, capital gains tax only applies to assets that have produced a profit during their time of ownership and do not apply to personal belongings such as clothing and furniture.

What is the Capital Gains Tax Rate in Canada?

Canada’s current capital gains tax rate is 50% of capital profits as set by the Canada Revenue Agency.

This means that the Canadian government applies tax to the profits gained by selling an asset for more than you paid; they tax 50% of your profits.

For instance, if you purchased a stock for $5,000 and sold it at $10,000, you have a capital gain of $5,000. You will have to pay capital gains tax on 50% of the total capital gains you made, which is $5,000. Meaning only 50% of the capital gains you made are taxable.

The capital gains tax rate also depends on the type of investment (whether short-term or long-term) and your other income.

But if you only have capital losses, the CRA will allow you to deduct the capital loss from a capital gain you initially declared in the previous three years or carry the loss forward.

How to Calculate Capital Gains Tax in Canada

Your capital gain tax is calculated by subtracting the value of your property’s adjusted cost base, along with all expenses and outlays incurred through the sale of your property, from the proceeds of the sale.

However, bear in mind that capital gains or losses on foreign currency capital property sales are calculated according to the following:

  1. The expenses and outlays are converted to Canadian dollars at the current exchange rate.
  2. The proceeds of disposal are converted to Canadian dollars at the time of the sale using the exchange rate.
  3. Using the exchange rate in effect when the property was acquired, the property’s adjusted cost base is converted to Canadian dollars.

You have a capital gain when you sell a capital property for more than its ACB plus the costs and expenses associated with selling the property.

In the case of property sales below the ACB plus expenses and outlays incurred through the sale of the property, you have a capital loss. You can apply half of your capital losses toward any taxable capital gains during the year.

However, capital gains on any of the following properties donated to qualified donees can be excluded from taxable income at a zero inclusion rate:

  • Investments in related segregated fund trusts
  • If you donate ecologically sensitive land to a qualified donee other than a private foundation, you might include an easement, covenant, or absolute servitude if certain conditions are met.
  • Investments in mutual funds
  • A share of a mutual fund corporation’s capital stock

In addition, any capital gain realized on the exchange of publicly listed securities makes the inclusion rate zero for donations of publicly traded securities as well.

What Happens if You Have a Capital Gain?

The following options are available to you if you have a capital gain:

Claim a reserve

A reserve is an amount immediately deducted from the selling price of capital property to reduce the income from the sale.  If you have a capital gain in a year, you may be able to claim a reserve to reduce your tax payable.

However, if you receive the capital gains over several years, you can claim only part of it in each tax year.

Claim a capital gains deduction

You might be eligible for the lifetime capital gains deduction of 50% if you have a capital gain on specific properties you sell.

In 2020, the deduction limit on capital gains from the disposition of qualified property was increased.

What Happens if You Have a Capital Loss?

If you incur a capital loss, you may use it to offset any capital gains earned throughout the year, bringing your balance to zero.

But if your capital losses exceed your capital gains for the year, you may incur a net capital loss.

In general, you may apply your net capital losses to the three previous years’ taxable capital gains and any subsequent years’ taxable capital gains.

When Is a Capital Gain Subject to Tax?

Capital gains are usually taxed only at the moment of disposal of the applicable capital property, in accordance with the realization principle.

They aren’t usually taxed as they accumulate. Unrealized profits may be deferred until the moment of disposal, whether actual or presumed.

Capital property may be considered to have been sold at fair market value in certain situations. A taxpayer’s death, relocation to or emigration from Canada, or a scenario where the purpose of the property altered are examples of such cases.

Furthermore, every 21 years, inter Vivos trusts are considered to have disposed of their property, limiting deferral possibilities.

When capital property is given as a gift or sold to a non-arm’s-length entity, the property is usually considered to have been sold for fair market value (FMV).

Also, only taxable capital gains are eligible for a deduction of one-half of capital losses.

Capital losses that have not been utilized may usually be carried back three years and carried over permanently, although they can only be used to offset capital gains.

How to Reduce or Avoid Capital Gains Tax in Canada

While capital gains tax is unavoidable for capital investment gains, there are strategies you can implement to reduce or avoid capital gains tax in Canada.

Below are some of the ways to reduce or avoid capital gains tax in Canada:

Engage in Tax-Loss Harvesting

Tax-loss harvesting is one of the strategies adopted by investors to reduce or even avoid the capital gains tax in Canada.

Tax-loss harvesting is the process of selling an investment at a loss and then offsetting that loss against capital gains in the same security or similar security to reduce or eliminate your tax liability.

You can reduce or avoid capital gains taxes in Canada by simply engaging in loss harvesting.

Capital losses can offset capital gains in the same year or be saved for use in future years. You are allowed to carry forward losses indefinitely until they are utilized.

That’s why it is a good idea to sell underperforming funds to create a capital loss that balances all or part of your capital gain.

Specific investing platforms keep track of your investments’ performance and automatically liquidate the underperformers.

Use Tax-Advantaged Accounts

Canada’s tax laws permit gains from the sale of stocks, bonds and mutual funds to be deferred or avoided altogether if held in a non-registered investment account.

Therefore, another way of reducing or avoiding capital gains tax in Canada is to use tax-advantaged accounts, such as registered savings plans and tax-free savings accounts, to hold investments that receive preferential treatment.

For example, you would hold investments that earn interest or dividends in a TFSA or RRSP, and hold investments that appreciate in value in a non-registered account.”

If the non-registered account is set up correctly – with certain tax-advantaged TFSAs and RRSPs – you can reduce or even eliminate the amount of capital gains tax you might pay. It’s about how you play the game!

Carry Over Losses to the Next Year

Bear in mind that capital losses cancel out capital gains. If you have capital gains and losses in the same tax year, the capital losses must be used to balance the capital gain.

However, you can carry forward capital losses to offset future capital gains if you only have a capital loss or do not have capital gains from the previous three years.

It may be necessary to contact a tax professional to complete this task correctly.

Donate Assets to Charity

One of the easiest ways to reduce or avoid paying capital gains tax is to donate these appreciated assets to a registered charitable institution.

The donation of publicly traded securities of a capital nature to a charitable institution is considered a gift of capital and not of income, and any capital gains tax triggered on the sale of these assets, whether realized or unrealized, is deferred.

A tax receipt is provided when you donate to a charity, allowing you to deduct a portion of the donation from your income tax. As an alternative to transferring cash to the registered charity, you can transfer shares.

For example, if you own a condo that you purchased ten years ago for $100,000 and it is worth $300,000 today, you would pay no capital gains tax on the condo sale if you donated it to charity.

Conclusion

As an investor, it is essential to know what capital gains tax entails to save costs in the long run.

Hopefully, you now understand how capital gains are taxed in Canada and the rate you’re expected to pay. Also, you know what to do to reduce your capital gains tax in Canada.

Check out: The Latest Cochrane Homes For Sale

Frequently Asked Questions On Capital Gains Tax Canada

How much capital gains are tax-free in Canada?

The exemption amount is determined by the total capital gain on the transaction. But, only 50% of capital gains are taxed in Canada.

Do seniors have to pay capital gains?

Senior people are not excluded from paying sales tax; they, like everyone else, must pay it.

Do you pay capital gains only when you sell?

Yes, you only pay capital gains tax after selling your assets and earning a profit above your initial capital.

How can I avoid paying capital gains tax on inherited property in Canada?

In Canada, there are no inheritance taxes. This implies that if you inherit an estate, you will not be subject to any taxation on the amount of the inheritance.

Instead, the estate would pay taxes before making any disbursements to you, which the estate’s executor would process.

Do I have to report the sale of my home to CRA?

If you sell your primary home, you generally don’t have to declare the sale on your taxable income, and you don’t have to pay tax on the gain.

Can you deduct realtor fees from capital gains in Canada?

Yes. You may also deduct money paid or due to agents if you paid a real estate agent commission to sell your rental property.

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