The Tax Blog for Smart Canadians

What are capital gains?

Simply put, capital gain is the profit you make when you sell an asset for more than you paid for it. That could be stocks, mutual funds, real estate (other than your primary home), or even certain types of collectibles. The Canada Revenue Agency (CRA) considers these profits a form of income, and there are specific rules about how they’re taxed.

How do you calculate capital gains?

Subtract what you originally paid for the asset (including any transaction fees, this is called your adjusted cost base or ACB) and your selling costs from what you sold it for. For example, if you bought shares for $10,000 and sold them for $15,000, your capital gain would be $5,000, minus any additional fees you paid to buy or sell.

How are capital gains taxed?

Income from capital gains is taxed differently than other income. Only 50% of your capital gain is taxable income. This percentage is called the “inclusion rate”. If your gain is $5,000, you only need to report $2,500 as income on your tax return. The actual amount of tax you pay depends on your personal marginal tax rate.

However, there are some capital gains that are exempt from tax. For example, gains from the sale of your personal home is usually tax exempt. This is called the principal residence exemption. Other exemptions exist for things like shares of a qualified small business corporation or certain family farm or fishing properties, which would be eligible for the capital gains deduction.

What about capital losses?

If you sell an asset for less than you paid, that’s a capital loss. The good news: capital losses can be used to offset capital gains, reducing the amount of taxable gains for the year. If your losses exceed your gains, you can carry the net capital loss back up to three years or forward indefinitely, to offset gains in other years. However, capital losses can only be applied against capital gains - not against regular income.

Useful tax strategies

Here are some useful tax strategies related to capital gains:

• Tax-loss harvesting: Sell investments that have lost value to offset gains elsewhere. These could be investments that you still want to have, but you can trigger a loss when they’re down by selling a portion of them to benefit from the tax deduction. The best way to execute this is to sell these investments in the month of December, wait 30 days, and then buy them back. The 30-day wait is necessary to avoid the superficial loss rule.
• Timing sales: If you expect a lower income year, consider selling assets then, since you’ll be taxed at a lower rate.
• Use available exemptions: Make sure you’re taking advantage of the principal residence or other qualified exemptions.

Conclusion

Capital gains can feel complicated, but the basics are straightforward: calculate your gain (or loss), remember that only 50% is taxable, and use losses and available exemptions to reduce what you owe. Keeping good records of your adjusted cost base and planning the timing of sales can make a meaningful difference at tax time.

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