Learn how capital gains are taxed and how to avoid paying more taxes than necessary when selling your assets.
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.
You have a capital gain when you sell an asset or investment for more than it cost you to acquire it. If you purchased $100 worth of stock and then sold those shares for $150 two years later, for example, you would have a capital gain of $50. On the other hand, when you sell an asset for less than its original purchase price, that’s called a capital loss.
Capital gains and losses can occur with many types of investments and property, including stocks, bonds, shares in mutual funds and exchange-traded funds (ETFs), rental properties, cottages and business assets. Capital gains generally do not apply to some types of personal-use property, such as cars and boats, whose value tends to decrease over time. They also don’t apply to the property you live in—your principal residence.
Capital gains are taxable in Canada. The value of a capital gain is treated as income earned during the tax year in which it was realized. There are, however, important exceptions to these rules, which we’ll run through below.
Watch: Capital gains tax, explained
Many Canadians mistakenly believe that the entire capital gain is taxed at a rate of 50%. In fact, only 50% of a capital gain is taxable, and the rate depends on where you fall within the federal and provincial income tax brackets in the year you report the gain. The gain is added to your taxable income. There’s no single “capital gains tax rate” in Canada, because the rate depends on how much you earn. The higher your total income (including employment) is for the year, the more tax you can expect to owe on a capital gain.
Also important to know: 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.
Let’s say you realize a capital gain of $50,000 this year. Half of that amount ($25,000) must be reported as income on your tax return when you file next year. If you fall in a 33% marginal tax bracket—the highest federal tax rate in 2023—the additional $25,000 in income results in $8,250 in taxes owing. The remaining $41,750 is yours to keep. And if you fall within a 26% marginal tax bracket, the same capital gain results in $6,500 in taxes owing—meaning you keep $43,500.
With the tax rates we currently have in Canada, and the fact that only half of a capital gain must be reported as income, no one is paying more than 27% in capital gains tax. Most people pay much less.
You can calculate whether you have a capital gain or loss by subtracting the asset’s net cost of acquisition from the net proceeds of its sale.
As simple as that may sound, there’s a bit more to it. To ensure you follow capital gains tax rules as set out by the Canada Revenue Agency (CRA), you’ll need to know the adjusted cost base (ACB), outlays and expenses, and proceeds of disposition.
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.
Capital gain or loss = proceeds of disposition – (ACB + outlays and expenses)
There’s no way out of paying taxes, and you could face an interest penalty for failing to pay your taxes or missing a tax deadline. Tax evasion is illegal in Canada, but you have the right to seek paying the least amount of tax possible within the law. It’s no different with capital gains. Here are some ways you can legally reduce the amount of capital gains tax you owe in Canada.
Watch: How to minimize capital gains tax
Any strategy aimed at reducing capital gains tax should begin with understanding the rules outlined above. Knowing which expenses to account for in calculating a capital gain can help reduce the amount, saving you from paying more taxes than necessary. For example, renovations, transfer taxes and legal fees can be deducted from the proceeds of disposition on the sale of a property to reduce the capital gain on real estate.
One of the easiest ways to avoid paying taxes on capital gains is to hold your investments in a registered account, such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), first home savings accounts (FHSA) or registered education savings plan (RESP).
Investments held in these accounts are tax-sheltered. That means your investments can grow in value or generate income (such as dividends and compound interest) tax-free. With TFSAs, you can even withdraw the funds without paying taxes on them. You or your beneficiary will pay taxes when withdrawing from an RRSP or RESP, but typically at a lower rate than you would if reporting the income on your tax return today.
If you have available RRSP contribution room, another option is to put the capital gain proceeds into an RRSP, which reduces your total earned income for the year.
You don’t pay any tax on capital losses; in fact, they can help offset the taxes you would otherwise pay on capital gains until the balance of capital gains for the year is reduced to zero.
You can claim capital losses to offset gains reported to the CRA during the previous three years, or you can carry those losses into the future—indefinitely—and apply them to another year. Note, however, that this applies only to income earned from capital gains; you can’t claim a capital loss against employment income.
People often look to realize capital losses late in the year, once their capital gains for the year are known, a process known as tax-loss harvesting or tax-loss selling.
Residential properties are considered an “asset” and are therefore subject to capital gains tax. There is one big exception to this rule. It’s called the principal residence exemption. A home that has served as your principal residence is exempt from capital gains tax, as long as it meets the following criteria:
You may also choose to donate securities, such as stocks 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.
The tax owed on capital gains is often less than Canadians believe. No, you do not lose 50% of a capital gain in taxes. In reality, only half of a realized gain is taxed, and your marginal tax rate determines your tax bill.
This means the amount you end up paying in tax will depend on how much 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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Are the rules the same for capital gains from disposition of foreign personal property? If a capital gain is paid in the foreign country (Mexico), is the amount paid considered an expense when calculating the actual net gain? OR can the amount be deducted directly from the Canadian tax payable?
Is there provincial tax payable on capital gains as well?
Thanks.
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 mother passed away this year, 2023. Her house was paid for. She lived in it for 50 years. Does the estate pay capital gains on the value now?