Selling your high-performing stocks or your investment property 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.
What is a Capital Gain or Capital Loss in Canada?
In simple terms, a capital gain is an increase in the value of an investment (such as stocks or shares in a mutual fund or exchange traded fund) or real estate holding from the original purchase price. If the value of the asset increases, you have a capital gain and you need to pay tax on it.
A capital loss occurs when the value of your investment or real estate holding decreases in value. If the current value of the investment or holding is less than the original purchase price, you have a capital loss. Capital losses can be used to offset capital gains and reduce the overall tax you will pay. You can carry capital losses back 3 years or forward into future years.
Capital Gains vs. Interest and Dividend Income
There are three main forms of investment income in Canada: interest, dividends and capital gains. It’s important to understand how different types of investment income is calculated for income tax.
How are capital gains calculated? How are they taxed?
In Canada, it’s incorrect to assume that capital gains are taxed at a rate of 50% consistently or that they are taxed completely at your marginal tax rate.
Instead, you only owe half of the increased value, or capital gain, on any given sale that is then taxed at the marginal tax rate, both federally and provincially. Both federal and provincial tax brackets are broken down into five tiers according to income, and you are only taxed the minimum tax rate according to how much money you made and what tier that amount falls into.
Each bracket pays a different rate of tax, as the table below shows:
Federal income tax
|2021 Federal income tax brackets*
|2021 Federal income tax rates
|$49,020 or less
|$49,020 to $98,040
|$98,040 to $151,978
|$151,978 to $216,511
|More than $216,511
* These amounts are adjusted for inflation and other factors in each tax year.
Before you can calculate your capital gain on an investment, there are some terms you need to be aware of.
The equation to calculate capital gains uses the values above and is laid out as follows:
Proceeds of disposition – (ACB + outlays and expenses) = capital gain
If the amount is less than the proceeds of disposition, then what you have is a capital loss that can be used to offset other capital gains in the future or up to three years in the past.
Can you avoid capital gains tax?
It’s not so much that you can avoid capital gains tax, but that there are CRA rules that you can take advantage of to reduce the amount you may owe. Here are a few: