Capital Gains Tax in Canada Explained

Capital Gains Tax in Canada Explained
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Taxes May 27, 2024 10 min read
Capital Gains Tax in Canada Explained

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There’s been quite a bit about capital gains tax in the news recently, so to help you make sense of the law and its recent changes, here we’re going to break down everything you need to know.

Let’s start with the basics: a capital gain is an increase in the value of an investment.

This investment could be stocks, bonds, property, mutual funds, or something similar.

Any investment that isn’t tax-sheltered is subject to capital gains tax.

The gain is the difference between what you paid for the investment, including fees and expenses incurred when acquiring the asset, and what it is worth now – its current value.

That difference (when positive) is subject to taxation.

However – and this is an important distinction – you only pay tax on realized capital gains.

You realize the gains when you cash out of the investment (for example, sell the property that has gained value).

But if you hold onto the investment, the gains are unrealized; the value of the investment could change in the future, and so you pay no tax until you sell.

What is a Capital Loss?

Just as a rise in the value of an investment can lead to a capital gain, a fall in the value of an investment can lead to a capital loss.

If the value of the asset at the time of sale is lower than the total amount it cost to purchase it (known as the adjusted cost base – the price of the investment plus all expenses, fees, commission and so on), you have a realized capital loss which must be taken into account in your taxes.

It’s also important to understand what a superficial loss is, as the CRA does not allow you to claim this type of capital loss.

What is the Capital Gains Inclusion Rate?

So now you have an idea about what capital gains are, and when capital gains taxes occur.

So far, so good.

But things are about to get more complicated, because capital gains tax isn’t applied to every dollar of capital gains you realize.

The inclusion rate is the percentage of your gains that are subject to tax.

The inclusion rate was a previously flat 50% however as of June 25th 2024, it has two levels for private individuals: 50% for the first $250,000 of realized capital gains in a given year, and 66.67% on any gains over $250,000. Businesses and trusts have a flat inclusion rate of 66.67%.

This tiered system marks a change (and a complication) from the previous flat inclusion rate of 50% for both individuals and businesses, and some people are confused about how to calculate their tax burden.

Calculating Your Inclusion Amount Using the 2024 Change

Very simply, if you as an individual make $10,000 in capital gains on an investment after June 25th 2024, you will pay capital gains tax on $5,000 of it, and no tax on the other $5,000.

This parallels the law before June.

However, if you as an individual make $300,000 in capital gains after June 25th 2024, you must calculate taxable capital gains as follows:

50% of the first $250,000 is taxable; this equals a taxable amount of $125,000

66.67% of the amount above $250,000, which in this case is $50,000, is taxable; this equals a taxable amount of $33,335

So the total taxable amount is: $125,000 + $33,335 = $158,335

As you can see, this means people earning more than $250,000 in capital gains in a year are subject to more tax (from June 25th 2024 onwards; gains and losses realized before June 25th 2024 are subject to the old inclusion rate).

And businesses, corporations and trusts must pay even more; the new inclusion rate of 66.67% for the entirety of any capital gains earned means that a business making $10,000 in capital gains would need to pay tax on $6,667 of it.

And a business earning $300,000 in capital gains would need to pay tax on $200,000 of it.

How to Calculate Capital Gains Tax in Canada?

So that covers how much of your money is taxable, but at what rate?

How much tax will you have to pay?

This depends on a lot of factors – including any capital losses, your income level, your tax deductions, and so on.

The easiest way to think of it is to consider your net taxable capital gains as a secondary source of income, which raises your overall income level and affects your tax burden accordingly.

This is true for both individuals and businesses, and is best illustrated with an example:

Example 1: A Simple InvestmentSam bought an investment property a few years back for $250,000.

This year he sells it for $600,000; the sale date is after June 25th 2024.

That’s a capital gain of $350,000.

We know from above that the inclusion rate is 50% on the first $250,000 of realized gains, and 66.67% on the amount above this threshold. So Sam will have to pay tax on:

50% x $250,000 = $125,000

+

66.67% x ($350,000 – $250,000) = $66,667

This means $191,667 will be the taxable amount from his capital gain.

Luckily for Sam, he had no other investments that were divested last year, so he has no other capital gains and no capital losses to take into account. This leaves his net taxable capital gain at $191,667.

Sam is employed and earns a salary of $80,000 a year.

His net taxable capital gain of $191,667 is effectively added to this amount, and his taxable income for the year becomes $80,000 + $191,667 = $271,667.

His tax rate on this income is calculated in exactly the same way all income tax is calculated by the CRA, using federal income tax rates.

What about something more complicated?

Here’s an example with a capital loss:

Example 2: Losing Money on StocksBarb has a range of investments, including stocks, bonds, a vacation property and a mutual fund.

This year she divested herself from part of her stock holdings.

To work out her tax bill, let’s look at exactly what she did:

a. PurchaseBarb bought 100 shares of A Company for $20 each.

She also paid a $25 commission to the broker who arranged the purchase.

Her total cost for the shares is therefore (100 x $20) + $25 = $2,025.

This can also be looked at on a per share basis: she paid $2,025 for 100 shares, making the adjusted cost base $20.25 per share.

b. SaleBarb sells half of her shares when their value drops to $10.

This means she sells 50 shares, for 50 x $10 = $500.

She also pays a broker fee for this transaction, of $25.

She therefore gets back just $475, or $475 / 50 = $9.50 per share. She keeps the other half of the shares, so their loss is unrealized and has no effect on her taxes.

c. Realized Capital LossBarb effectively spent $20.25 x 50 = $1012.50 for the block of shares in question, and got back $9.50 x 50 = $475. That’s a capital loss of $1012.50 – $475 = $537.50.

Barb can therefore deduct her realized capital loss, $537.50, from her annual income, to slightly lower her overall tax burden.

Example 3: Multiple InvestmentsMatt has a portfolio of investments, including property and stocks.

During the 2025 tax year, he performs the following transactions:

a. Property Sale

An investment property that originally cost Matt $300,000 is sold for $575,000.

This equals a realized capital gain of $275,000 for this investment.

b. Stock Sale

In addition, Matt sells some stocks.

The original purchase price of the stocks in question was $50,000, and the sale price is $35,000.

This equals a realized capital loss of $15,000.

c. Calculating Overall Capital Gains

Matt makes no other transactions that result in realized capital gains or losses in the year; he can therefore calculate his net by combining his gain and loss, leaving him with a total realized capital gain of $275,000 – $15,000 = $260,000.

d. Calculating Inclusion Rate

Using the inclusion rates as explained above, we can calculate that Matt’s taxable amount is:

50% of first $250,000 = $125,000

+

66.67% of ($260,000 – $250,000) = $6,667

This means he has a taxable capital gain of $131,667.

e. Calculating Tax Rate

Matt is not employed and has zero regular income.

However, his net taxable capital gains are still effectively added to his regular income amount, and his taxable income for the year becomes: $0 + $131,667 = $131,667.

His tax rate is then calculated according to income tax rules as calculated by the CRA, using federal income tax rates.

How to Avoid Capital Gains Tax?

1. Timing Your Sale

Being smart about when you divest yourself from investments can be a powerful way to reduce your overall tax bill.

For example, if you know you have already made a capital gain in one year, consider putting off the sale of another successful investment until the next year.

This spreads your capital gains out and reduces your effective tax rate each year.

Or, if your income fluctuates, pick a lower earning year to sell investments, so your overall taxable income stays as low as possible.

2. Transfer Ownership

Another smart move is to transfer ownership of an asset to a loved one, but pick your moment.

If you choose to transfer ownership while the asset is in the red (i.e. would trigger capital gains loss), this means you can apply the loss to other investment successes, while your loved one gets to hold onto the asset, which may well appreciate in the future.

If you’re set to inherit property, note that assets are marked to fair market value and any capital gains are to be paid by the estate before one inherits the property.

3. Deferring Gains/Losses

Capital gains and losses do not have to be dealt with in the tax year immediately following the year they are realized.

The CRA allows taxpayers to defer their capital gains tax burden by up to three years – meaning you can defer either your losses or your gains to years when it will have the most impact on your taxes.

This is very helpful, as capital losses can be used to offset capital gains, and so lower your overall tax burden.

4. Donate to Charity

Charitable donations are tax deductible, and donations do not have to be cash.

You can donate an asset to charity (known as an in-kind donation), and you will receive a tax receipt for the current fair market value of that asset.

This means that if you have an asset that has appreciated, you can donate it, avoid paying capital gains on it, and receive a tax deduction for the full amount.

5. Utilize Tax-Free Accounts

Using registered, tax-sheltered accounts like TFSAs, RRPs, RRSPs and RESPs is an efficient way to hold investments without having to worry about extra taxes.

And if you can prioritize holding higher-earning investments in these vehicles, even better.

6. Lifetime Capital Gains Exemption (LCGE)

For Qualified Small Business Corporation Shares, Qualified Farm Property, and Qualified Fishing Property, the Lifetime Capital Gains Exemption provides you with a tax deduction which can substantially reduce your tax payable on a capital gain of qualifying property.

Don’t Forget!It’s crucial that you stay on top of the financial obligations that come with your investments. While it is both legal and prudent to use the tax code to lessen your financial burdens, the letter of the law is clear and must be followed. Simply not paying for or registering your capital gains with the CRA is illegal.

Frequently Asked Questions

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Who has to pay capital gains tax in Canada?

Anyone filing taxes in Canada who has made a qualifying capital gain.

What types of assets are considered capital property and subject to capital gains tax?

Stocks, bonds, mutual funds, land, property other than your primary residence, cottages, equipment and other investments are all subject to capital gains tax. Only registered investments in government-approved tax-sheltered vehicles are not.

Are gifts to family members taxable?

Yes. Transferring the ownership of an investment to a family member counts as disposition of that investment, and so the gift becomes subject to capital gains tax.

What is exempt from capital gains tax?

There are a couple of exemptions from capital gains tax. This includes primary residences, and something known as the lifetime capital gains exemption, which applies to qualified small business shares, qualified farm properties, and qualified fishing properties.

Do I have to pay capital gains tax on my house?

No. Primary residences are exempt from capital gains tax; you do still have to report the sale of your home on your taxes, but if you lived in the home the entire time, you qualify for the primary residence deduction and so your effective capital gains taxable amount for that property falls to zero.

How do I calculate capital gains on foreign assets?

Foreign assets can quickly become complicated, but the important thing to note is that you must convert everything into Canadian dollars, and you must use the exchange rate from the time of action to do so. So the exchange rate from when you invested may differ quite a bit from when you divested, but you must find out both and use them appropriately to calculate the equivalent values in CAD.

Can I split capital gains with my spouse to reduce my taxes?

No. Capital gains and losses cannot be transferred between spousal tax returns. However, if you purchase an investment jointly with a spouse, then the capital gains upon sale can be split between you.

Contributors

Amy Orr
AUTHOR

Amy Orr

Amy Orr started her career with several prestigious internships in investment banking and asset management. In 2007 she went on to graduate with an MSc in Finance and Investment from the University of Edinburgh Business School.

She has since spent years as both a Portfolio Analyst and as a Financial Researcher/Writer, in both the UK and Canada.

Versed in the intricacies of multiple financial markets, her forte is parsing complex technical concepts into relatable, digestible content for the masses.

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