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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 only when assets (such as stocks, bonds, precious metals, real estate, or other property) are 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 may 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.
How Capital Gains Tax is calculated
In Canada, the taxable capital gain must be reported as income on your tax return for the year the asset was sold. The income is considered 50% of the capital gain.
For example, if you sold an asset for $2,000 that has an ACB of $1,000, the taxable income is $500. ($1,000 gain x 50%). 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.
Capital Gains vs. Interest and Dividend Income
It's important to understand how different types of investment income is calculated for income tax.
- Capital gains: In Canada, only 50% of the total capital gains is taxable. It is included in your annual taxable income and taxed at your marginal tax rate. Capital gains only apply when you sell an asset at a profit.
- Interest Income: The money earned in the form of interest on assets, such as bonds and GICs, 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: The money earned in the form of stock dividends is taxed at a lower tax rate than interest income. Canadian dividend-paying stocks may be eligible for the dividend tax credit. For eligibility and calculation, please visit CRA site.