Capital gains taxes explained
How capital gains are taxed and how to keep more of that money for yourself
Potential tax changes due to COVID-19
The pandemic has led to a significant amount of...
What are capital gains?
You have a capital gain when you sell, or are considered to have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate) for more than you paid for it (the adjusted cost base) less any legitimate expenses associated with its sale.
How are capital gains taxed?
Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep.
The CRA offers step-by-step instructions on how to calculate capital gains.
How to keep more of your capital gains for yourself
There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:
- Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
- The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read “Can you avoid capital gains tax?”
- A donation of securities to a registered charity or private foundation does not trigger a capital gain.
- If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.
If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.
You can learn more about how to minimize your tax bill here:
- How to get the most out of the capital gains exemption
- How to calculate capital gains on U.S. stocks
- Advice for managing capital gains on non-registered investments
Originally published April 7, 2014 and updated
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I have two properties standing next to each other, one is on the Corporate Business Account and one the other has three owners and is used as a rental for income tax. The Corporate was also a rental. The city has approved the subdivision of the two lots to three lots for construction purposes. The directors of the corporation and the same as the co-owners of the personal rental. What action can be taken to transfer one property to a combined ownership. The personal one has a mortgage but the corporate house does not. How can this be resolved without capital gains being paid.
Hi Alex, thanks for the question.
Due
to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
My wife and I have two properties one a home, in both our names and the other a cottage that is in her name. We are considering renting the home out and designating the cottage as our full time residence. The cottage has a capital gain exceeding $1 million so there would a financial impact. By applying 50% of the gain or $500K to my wife’s income we could re-establish the threshold value of the cottage as our principal residence. My wife is currently receiving OAS, CPP and a small pension thus she is an extremely low marginal tax bracket. Am i right in assuming the capital gain won’t move her up in tax brackets and she’ll have a relatively small tax bill with CRA?
Response from the MoneySense editorial team:
Hi Jim, thanks for your question.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected],
where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.