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A closer look at Capital Gains Tax in Canada
Summary
If you sell an investment for more than you paid, you may have a capital gain and could owe tax. In Canada, only 50% of your capital gain is taxable, and that amount is added to your income and taxed at your marginal tax rate. Capital gains are calculated based on the difference between your selling price and your Adjusted Cost Base (ACB), which includes your purchase price and certain costs like commissions or fees. You may be able to reduce your tax by offsetting gains with losses or using registered accounts like a TFSA or RRSP. Understanding how capital gains are taxed can help you make more informed investment decisions.
Table of Content
- What are Capital Gains?
- Capital Gain vs. Capital Loss
- How Capital Gains Tax is Calculated
- Capital Tax Exclusion Rate
- Lifetime Capital Gains Exemption (LCGE) Limit
- Taxable Capital Gain Explained
- Capital Gains vs. Interest and Dividend
- Income
- Day trading and Capital Gains Tax
- Minimizing Capital Gains Tax
- Frequently Asked Questions
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If you’ve recently earned profit from selling an investment, you may be required to pay capital gains tax. In Canada, capital gains or losses are realized when assets (such as stocks, bonds, precious metals, real estate, or other property) are sold or deemed to be sold and are subject to capital gains tax.
In this article, we will focus solely on gains realized through the sale of securities (most notably stocks). A good understanding of this form of taxation could help you formulate personalized tax saving strategies.
While this article offers general guidance, it is not tax or investment advice. It is always in your best interest to work with a tax or investment professional who can offer personalized support.
What are Capital Gains?
If you sell an asset that is held within a non-registered account, which you hold as capital property for more than you paid for it, the profit you earn is considered a capital gain.
To calculate capital gains, you first need to determine the asset’s Adjusted Cost base (ACB). The ACB is the price you paid for the asset, plus additional costs, including commission or legal fees you incurred to acquire it. Once you know what your ACB is, simply subtract it, and any outlays or expenses incurred to sell the asset, from the proceeds of sale. Any remaining profit is your capital gain.
For example, if you bought an asset for $500, and paid $20 in commission fees, your ACB would be $520. If you later sold that asset for $1,000, your capital gain would be $480 ($1,000 minus $520).
Capital Gain vs. Capital Loss
Capital Gains are profits you make when you sell a capital asset for more than its cost. On the other hand, a capital loss occurs when you sell an asset for less than its ACB.
When filing your personal income tax return, you are allowed to offset capital gains with capital losses, thus sheltering that portion of the capital gain from taxation. Take note that net capital losses may generally be used to offset a taxable capital gain in any of the three preceding years or in any future year (i.e., they do not expire).
What is Capital Gains Tax and how it is calculated?
You may have to pay tax on any capital gains that you earn outside of a tax-sheltered account. However, in Canada, you’re only taxed on a portion of your capital gains. The portion of capital gains subject to tax is called the capital gains inclusion rate.
Capital Gains Inclusion Rate
Currently, the inclusion rate for individuals in Canada, is one-half of capital gains. This means if you have a capital gain of $100, only $50 is taxable.
In Canada, taxable capital gains must generally be reported as income on your tax return for the year the asset was sold or deemed sold. For example, if you sold an asset that has an ACB of $1,000, the taxable income (assuming a one-half inclusion rate) is $500 ($1,000 gain x one-half inclusion rate). The $500 will need to be added as taxable income and you’ll be taxed at your marginal tax rate based on your tax bracket.
Taxable Capital Gain Explained
A taxable capital gain is the portion of your capital gain that is subject to tax. In Canada, only 50% of your capital gain is taxable, meaning half of the profit from the sale of an investment is added to your income for the year. This amount is then taxed at your marginal tax rate, which depends on your total income and province of residence.
Capital Gains vs. Interest and Dividend Income
It’s important for individuals to understand how different types of investment income are calculated for income tax.
- Capital gains: In Canada, currently only one-half of the total capital gain is taxable. . The taxable portion of a capital gains is taxable at your marginal rate.
- Interest Income: The money earned in the form of interest on assets, such as bonds and GICs in a non-registered account is taxed at the same marginal tax rate as ordinary income. For example, $100 interest earned on a 1-year GIC must be included in your annual total income.
- Dividend Income: Generally, the money earned in the form of dividends from Canadian securities is taxed at a lower tax rate than interest income. Canadian dividend-paying stocks may be eligible for the dividend tax credit. For eligibility, calculation and more information please visit CRA site.
Day trading and Capital Gains Tax
If you are deemed to be day trading in a registered, or non-registered account, and certain other conditions apply, you may be considered to be carrying on a business, and any profit you make on the sale of securities may be treated as business income subject to 100% inclusion in income by the CRA.
Minimizing Capital Gains Tax
Here are a few ideas that could help reduce your capital gains tax burden in Canada
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Use tax-free or tax-sheltered accounts: A tax-free savings account (TFSA) can help you avoid capital gains tax. The income you earn in a TFSA on most types of investments is not taxable, even when the gain is realized. Funds withdrawn from a TFSA are also generally not taxable. A major exception is dividend income from U.S. and foreign corporations, which may be subject to withholding tax. Please note, TFSAs have a yearly contribution limit and exceeding your limit results in monthly taxation on the excess amount. Read: How to make the most of your TFSA contribution limit.
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A registered retirement savings plan (RRSP) can also help reduce your tax burden. Capital gains in an RRSP are not taxed when the gain is realized, but taxed as income when the funds are withdrawn. Withdrawals are taxed at your marginal tax rate as income and in some cases could be subject to a withholding tax upon withdrawal, which can vary based on the amount and province of residence.
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Tax loss harvesting: In Canada, you may be able to offset taxable capital gains with net capital losses. This reduces your overall tax burden and is known as tax loss harvesting. Lower-performing funds in a portfolio that generate a capital loss could be used to offset all or part of any realized capital gains. These net capital losses can be used to offset taxable gains realized in the last three years or in any future year as they do not expire. However, please note that the Income Tax Act does not allow the use of capital losses within registered accounts to offset gains in other accounts.
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Track expenses: It can be a good idea to keep track of any qualifying expenses incurred in securing or maintaining investments (such as, management or legal fees), which may serve to increase or decrease the Adjusted Cost Basis (ACB) of your investments. Capital gains tax is calculated when certain assets are sold or deemed sold for more than their ACB.
Capital gain income is a sign that your investments are growing. However, careful planning along with gathering relevant information is essential when it comes to achieving a desired tax result.
Frequently asked questions
Are there changes to capital gains tax in Canada?
The federal government proposed changes in Budget 2024 to increase the capital gains inclusion rate to 66.67%, but these changes did not come into effect. As it stands today, the inclusion rate remains 50% for all taxpayers, including individuals, corporations, and trusts.
How do I report capital gains and losses on my tax return?
Capital gains and losses can be reported on Schedule 3 of your annual tax return. You will need to provide certain details including the cost of the asset, what you sold it for, and any associated expenses.
What is the capital gains exemption in Canada?
The Lifetime Capital Gains Exemption (LCGE) allows eligible Canadians to reduce or eliminate tax on capital gains from the sale of qualified small business corporation shares, or qualified farm or fishing property.
Currently, the LCGE limit is $1,016,836, and it is indexed annually for inflation.
In Budget 2024, the federal government proposed increasing this limit to $1.25 million on eligible capital gains. However, this change has not yet been enacted and remains subject to final legislation.
For now, the existing LCGE limit continues to apply.
How much capital gains tax will I pay in Canada?
In Canada, you don’t pay tax on the full amount of your capital gain. Instead, 50% of your capital gain is taxable. This is known as the capital gains inclusion rate.
For example, if you earn a capital gain of $1,000, $500 is added to your taxable income for the year.
The amount of tax you pay depends on your marginal tax rate, which is based on your total income and your province of residence. This means the actual tax owed will vary from person to person.
Capital gains are only taxed when you sell an asset at a profit, and any capital losses can generally be used to offset gains, which may help reduce the amount of tax you pay.
For more information on capital gains tax in Canada, visit the CRA website HERE.
What does Adjusted Cost Base mean?
The Adjusted Cost Base (ACB) is the total cost of an investment or property, used to determine your capital gain or loss when you sell.
How do I calculate capital gains on a property in Canada?
To calculate capital gains on a property, you subtract the property’s Adjusted Cost Base (ACB) from the selling price.
The ACB typically includes:
- The original purchase price
- Legal fees and closing costs
- The cost of eligible improvements
Once you determine the capital gain, 50% of that amount is taxable and added to your income for the year. The tax you pay will depend on your marginal tax rate.
If the property qualifies as your principal residence, you may be eligible for the principal residence exemption, which can reduce or eliminate the capital gain.
For more information on calculating capital gains and losses in Canada, visit the CRA website here.
What is the capital gain tax on primary residence in Canada?
In Canada, the sale of your primary residence is generally not subject to capital gains tax due to the principal residence exemption.
If the property qualifies as your principal residence for all the years you owned it, you can typically eliminate the capital gain entirely, meaning no tax is payable on the sale.
To qualify, the property must be designated as your principal residence for those years and you must report the sale on your tax return.
If the property was not your principal residence for the entire period you owned it, a portion of the capital gain may be taxable.
For more information, visit the CRA website HERE.
How can I avoid or reduce capital gains tax in Canada?
There are several ways that may help reduce capital gains tax:
- Use registered accounts: Investments held in a TFSA grow tax-free, while gains in an RRSP are tax-deferred until withdrawal
- Offset gains with losses: Capital losses can be used to offset gains in the current year, the previous three years, or carried forward indefinitely
- Claim eligible exemptions: The Lifetime Capital Gains Exemption may apply to certain small business shares or farm and fishing property
- Track your costs: Keeping records of fees and improvements can increase your adjusted cost base and reduce your gain
Careful planning can help manage the tax impact of your investments. Consider speaking with a tax or investment professional for guidance tailored to your situation.
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