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What are capital gains?
A capital gain occurs when you sell an asset or investment for more than the original purchase price, meaning you earn income from the sale. This applies to stocks, bonds, and units in mutual funds and exchange-traded funds (ETFs), as well as rental properties, vacation homes, and business assets and equipment. On the other hand, if you sell an asset for less than its original purchase price, this is known as a capital loss.
Certain types of property are not subject to capital gains rules. A home that has served as your primary residence is exempt from capital gains tax – so long as it was your primary residence for all the years you owned it, or for all but one year. (Actually, there is no such thing as a “capital gains tax,” but more on that below.) The same is true of other forms of personal property, such as cars and boats, which typically don’t appreciate in value over the years.
What is the Capital Gains Tax Rate in Canada?
Contrary to popular belief, capital gains are not taxed at a fixed 50% rate, nor are they taxed in their entirety at your marginal tax rate. Rather, only half (50%) of the capital gains from a given sale will be taxed at your marginal tax rate (which varies by province).
For example, if you have a capital gain of $50,000, only half of that amount, $25,000, is taxable. And the tax rate depends on your income. For a Canadian falling into a 33% marginal tax bracket, the $25,000 income from the capital gain results in a tax liability of $8,250. The remaining $41,750 stays with the investor.
How are capital gains taxed?
According to the Canada Revenue Agency (CRA), to calculate the capital gain or loss on a recently sold asset, such as real estate or stocks, you need the following information:
- Sale Proceeds: The value of the asset at the time of sale
- Adjusted Cost Basis (ACB): The amount originally paid
- Expenses and expenses: Sum of the costs deemed necessary before the sale, such as
Once you have those three numbers in hand, you can calculate the capital gain by subtracting the ACB and expenses and expenses from the capital gains.
Proceeds of Sale – (ACB + Expenses and Costs) = Capital Gain
A capital gain is not taxed until it is ‘realised’, ie the asset has been sold. As long as the gain is ‘unrealised’, ie the paper value of the asset has increased but the asset remains in your possession, you do not have to pay any tax on it. One strategy for reducing tax amounts is to plan the sale of the asset for a period when your income will be lower — for example, when you’re retired or on furlough from work.
