Capital gains tax in Canada, explained
Learn how capital gains are taxed and how to avoid paying more taxes than necessary when selling your assets.
Learn how capital gains are taxed and how to avoid paying more taxes than necessary when selling your assets.
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Selling your high-performing stocks or your cottage with a view can reap significant profits, and those moments are worth celebrating. But while you’re enjoying the spoils of your investments, keep in mind that you’ll eventually have to pay tax on them. In Canada, most gains on capital assets are taxed. Let’s look at strategies to avoid paying more taxes than you need to come tax time.
A capital gain occurs when you sell an asset or investment at a higher value than its original purchase price, meaning you earn income from the sale. This applies to stocks, bonds and shares in mutual funds and exchange-traded funds (ETFs), as well as rental properties, cottages and business assets and equipment. On the other hand, when you sell an asset for less than its original purchase price, that’s called a capital loss.
Certain types of property are not subject to the rules of capital gains. A home that has served as your principal residence is exempt from capital gains tax—as long as it has been your primary residence for all the years you’ve owned it or for all years except one. (There’s not actually a “capital gains tax,” but more on that below.) The same goes for other forms of personal-use property, such as cars and boats, whose value doesn’t usually increase over the years.
Watch: Capital gains tax, explained
Contrary to popular belief, capital gains are not taxed at a set rate of 50%, nor are they taxed in their entirety at your marginal tax rate. Rather, only half (50%) of the capital gain on any given sale is taxed at your marginal tax rate (which varies by province).
On a capital gain of $50,000, for instance, only half of that amount, $25,000, is taxable. And the tax rate depends on your income. For a Canadian who falls in a 33% marginal tax bracket, the income earned from the capital gain of $25,000 results in $8,250 in taxes owing. The remaining $41,750 is the investor’s to keep.
To calculate the capital gain or loss on recently sold assets, such as property or stocks, you’ll need the following details, according to the Canada Revenue Agency (CRA):
Once you have those three numbers in hand, you can calculate the capital gain by subtracting the ACB and outlays and expenses from the proceeds of disposition.
Proceeds of disposition – (ACB + outlays and expenses) = capital gain
A capital gain is taxed only once it is “realized,” meaning the asset has been sold. As long as the gain is “unrealized,” meaning the asset’s value has increased on paper but the asset remains in your possession, you do not have to pay taxes on it. One strategy to reduce the amount of tax is to time the sale of the asset for a period when your income will be lower—for example, when you’re retired or on leave from work.
If you sell an investment for less than what you paid, you have a capital loss. You don’t pay any tax on capital losses; in fact, they can help offset the taxes you would otherwise pay on capital gains.
There are several ways to legally reduce, and in some cases avoid, paying taxes on capital gains.
The first thing to know is that capital gains can be offset with capital losses from other investments, until the balance of capital gains is reduced to zero.
If you have only capital losses in a given year, you can use them to offset gains reported to the CRA during the previous three years. You can also choose to carry those losses into the future—indefinitely—and apply them to another year. The only thing you have to remember is that you can’t claim a capital loss against regular income.
You may want to keep your investments in a registered account, such as a registered retirement savings plan (RRSP), a registered education savings plan (RESP) or a tax-free savings account (TFSA). Investments held in these accounts are tax-sheltered. With RRSPs and RESPs, you’ll pay tax when you withdraw the funds, and TFSA withdrawals are tax-free.
You may also choose to donate securities, such as shares and bonds, by transferring ownership to a registered charity. Taxes on capital gains do not apply to capital transfers to charitable organizations. This allows you to give more than you would with cash—selling the asset first would result in taxes owed—and still receive a charitable tax receipt for the amount donated.
There are many misconceptions about capital gains tax in Canada, including the belief that all gains are taxed at a rate of 50%. In reality, only half of a realized capital gain—50% of the income you earn from selling an asset—is taxed at your marginal tax rate.
This means the amount you end up paying in tax will depend on the degree to which your asset has grown in value, as well as your other sources of income. And between tax-sheltered investment accounts, the principal residence exemption and the rules around capital losses, there are many legitimate ways to ensure you don’t pay more tax than necessary in any given year.
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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.
I have unused net capital losses from prior years. Can I use them for capital gains tax by withdrawing from RRSP?
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.
Recently sold a rental property and part of proceeds was used to pay off the outstanding mortgage balance on the property. Could this amount be used to reduce capital gains on the sale?
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.
If your job currently laid you off and you are collecting unemployment, do capital gains effect your benefits? If I sell a stock in a company at higher price then what I bought the shares for, are those gains considered income and need to be reported to unemployment? Thank you for your time
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.
I live in Québec province. I Bougot a house in Toronto and sold It recently. Should i have to file capital appriciation in both provincial and federal?
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.
I am the sole owner of a house in BC. I want to add my son to the title to avoid probate fees if I should pass, have medical issues. This is not his principal residence so I understand captial gains may affect him when he sells the house. My question is, will it cost more in probabe fees or capital gains for my son.
Thank You
Thank you for the question. 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.
I bought a house in 2020 It has been my personal residence. I have been here about 9 months . I am looking to sell off a piece of the property will I be tax on that to sell an extra lot
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.
Say I made 12,000 off a stock, and sold 6,000 of the stock, but reinvest that same amount in other stocks. Do I still have to pay a capital gains on that 6,000.
Thanks for the question. 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.
Q. I plan to sell my property, which was my primary residence from 2004 to 2018. In 2018, I rented it out until now. If I’m selling now, how will the capital gain be calculated?
We appreciate the question and 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.
With all these questions, why not make take the time to craft another article answering them?
Capital gains aren’t taxed as low as this article makes you think. The so-called “alternative minimum tax” (AMT) can become quite a surprise.
my earning is around 25 k/year with a capital gains of 50k. What will be my tax amount?
Why are there no answers to questions. Why post them if you are not going to answer. Are questions answered only to the questioner.
are the capital gains on a cottage based on Selling Price or appraised Value according to MPAC in Ontario
I purchased a house in 1993 and lived in it with my wife and her son until 2003. My stepson has continued to live there until the present. As per an article in the Financial Post, it qualifies as exempt of Capital Gains Tax because a family member has continued to reside there as his primary residence. Can I rely on this?
Due to your inability to answer any questions (Due to the large volume of comments you receive) I regret to inform you that you are basically useless to your readers.
I am a 1/3 owner of a rental property that sold in 2021. How do I only claim a 1/3 portion of the capital gain?
do I exempt from capital gain tax even if I rent part of my principal residence?
Thank you for the question. We invite you to email it to [email protected], where it will be considered for future articles.
I see most of the comments are separated by at least a month. May I ask where the rest of the large volume of comments are being redirected?
Selling deceased brothers inherited property to settle estate. No wife, no kids no parents
Value at date of death 173000.
If we sell for 273,000.
Do we pay capital gains tax on total gain. or on 50% of total gain
Thank you
A worthwhile note: Tax deferral on reinvestment pertaining to rental real estate properties.
E.G. When a rental real estate property is sold by an investor, they incur taxes on any nominal capital gains & taxation on the recaptured CCA.
An investor may defer the tax on the sale of a property if the proceeds of a sale are reinvested in a replacement property within 12 months of the sale. On this basis, no capital gains have been realized. Only an exchange of properties occurred.
Have three children and if I decide to give one of them my multi million dollar property for one dollar, does that escape paying taxes?
I owned-live in a place.
I got married and moved out. I still have my place, my son lives there
Do i pay capital gain taxes if i/we back later in life
We are thinking of selling our primary residence that we’ve only had for 1 year and not because we don’t like it but because we feel we can’t afford it anymore. We want to relocate and buy a house for half the price and have no mortgage. My yearly income is considered poverty level at just over $30K but together we make about $100K/yr., which is not enough to live in the Lower Mainland anymore. We are struggling financially a lot and this is why we would sell. Would the government force us to pay capital gains because we sold before the 2 year mark because we feel we can’t afford our home? Or can we write a letter and explain our financial woes and avoid it? We’re not selling because we’re trying to gain money, its because we can’t afford to live!