Table of Contents
What Is A Capital Gain Or Capital Loss?
A capital gain or loss is the difference between the purchase price of an investment and the proceeds received when it’s sold. The goal with any investment is to buy low and sell high so that you can generate a capital gain. However, there are times when investments are sold at a loss instead. Understanding what constitutes a capital gain or loss can help you make more informed decisions.
A capital gain is an increase in the value of a capital asset, such as stocks, bonds, or real estate, minus any costs associated with selling the asset. Capital gains are generally taxed at a lower rate than other forms of income and may be exempt from taxation altogether.
In Canada, there are two types of capital gains: realized and unrealized. Realized capital gains occur when an asset is sold for more than its original purchase price. Unrealized capital gains arise when an asset’s value increases but is not sold. For example, if you buy a stock for $50 and it later increases to $100, you have an unrealized capital gain of $50.
A capital loss occurs when you sell an asset for less than its original purchase price. If you have a capital loss, you can use it to offset any capital gains you realized during the year. You can also carry forward your unused capital losses and use them to offset capital gains in future years.
How are Capital Gains taxed in Canada?
In Canada, capital gains are taxed at a rate of 50% of the gain if the asset is sold within one year of it being bought and at a rate of 26.67% if the asset is held for longer than one year. The tax is applied to the sale price minus the original purchase price and any expenses incurred in selling the asset (such as broker fees). There are some special rules for determining the tax on capital gains from mutual fund purchases, and FOREX transactions may also be subject to different treatment.
There are a few exceptions to this general rule when it comes to the taxation of capital gains. For example, if you sell your principal residence, you may be eligible for certain exemptions depending on certain conditions being met. There are also a few other assets that may be exempt from capital gains tax, such as qualified small business corporation shares and certain farm or fishing properties.
To encourage investment, the government taxes capital gains at a lower rate than other forms of income. This provides an incentive for people to invest their money, as they will keep more of the profits from the sale of their investment.
The tax rules for capital gains and losses are different for individuals and corporations. For individuals, capital gains and losses are included in your taxable income and taxed at your marginal tax rate. For corporations, capital gains are generally taxed at the corporate tax rate, which is lower than the marginal tax rate for individuals.
Calculating Capital Gains Tax On Real Estate in Canada
The adjusted cost base is a crucial data in calculating the capital gains tax on real estate in Canada. Adjusted cost base (ACB) is the term used in Canadian tax law to refer to the cost of an investment for tax purposes. The ACB is important because it’s used to calculate the taxable profit or loss on the sale of an asset. This profit or loss is then taxed at your marginal tax rate. You can calculate the ACB using:
Adjusted cost base = Original Purchase Price Of The Investment + Costs To Acquire It (ex: fees)
You can use the ACB to calculate the taxable amount:
Capital Gain Subject To Tax = Selling Price (Net Of Fees) – ACB
For example, you bought 100 shares for $1000 and you paid $50 for the commission. You need to add them to know your ACB which is now equal to $1050.
Let’s say you decided to buy more shares however the price has increased. This time you buy 200 shares at a total cost of $2500 plus the $50 commission. Your ACB will be $2550.
To compute your ACB per share, you need to add all your ACB which is $3600 in total and divide it with the total shares you have. This gives you $12 per share.
If you planned to sell some shares at a price that’s more than your investment, you will have capital gain. If you sell it for less, you’ll have capital loss.
- For instance, you decide to sell 200 shares when the price reaches $40 per share. This gives you $8000 (200 x 40). Deduct the brokerage fee of $50. You’ll have $7950 as your market price.
- To see if you have gained or lost, multiply the number of shares you sold to your ACB. For this case, we have 200 x $12 = 2400.
- Deduct this ACB from the sale price: $7950 – 2400 = $5,550. This means you have a capital gain because it’s more than your ACB.
In Canada, 50% of your capital gain is taxable. The amount of tax will primarily depend on your earnings. For this example, $2,775 ($5,550 x 50%) is included in your taxable income. Capital gains taxes is for all property types in Canada.
Capital Gains On Principal Residence
Simply put, capital gains on principal residence refer to the increased value of your home over time. When you eventually sell your home, you’ll be able to pocket the difference between the sale price and the original purchase price.
There are a few things to keep in mind when it comes to capital gains on your principal residence. First, you can only exclude up to $250,000 in capital gains if you’re single OR $500,000 if you’re married and filing jointly. This means that if your home has appreciated significantly in value, you may have to pay taxes on the portion of the gain that exceeds these limits.
Second, you must have owned and lived in your home for at least two out of the five years leading up to the sale in order to qualify for the exclusion.
And finally, you can only exclude capital gains from the sale of your principal residence once every two years. So, if you sell your home and then buy a new one, you won’t be able to exclude the capital gains from the sale of your new home until at least two years have passed.
There are also situations that trigger capital gains on principal residences. These include if your home is not your principal residence for the years you’ve owned it. Also, if you use a portion of your home for rental or for business purposes.
Tips to Reduce Your Capital Gains Tax on Real Estate
Right Timing To Sell Investments and Properties
Selling investments and capital property that have been held for less than a year generally results in a higher tax rate than selling investments and property that have been held for more than a year. For this reason, it may be advantageous to hold onto investments and property for at least a year before selling them.
If an investor sells investments and property shortly after they were bought, this is considered to be a “short-term” sale, and it will generally result in a higher tax rate than if the sale was considered “long-term”. Investors in the highest tax bracket may be able to save on taxes by selling investments and property that have appreciated in value during a year when their marginal tax rate is lower than it would be in other years.
Tax Advantage Accounts
Tax advantaged accounts, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), allow you to defer taxes on investment income and capital gains. That means that if you sell a property that has increased in value, you will have to pay taxes on the profits at a lower rate.
For example, if you sell a property for $500,000 and have only paid tax on the profits up to this point, you will have to pay tax on the remaining $100,000 at your regular income tax rate. However, if the property was sold within a tax advantaged account, you would only pay tax on the profits above your contribution limit for that year. In this case, you would only pay tax on the $50,000 in profits.
Give Away Assets
When you give away assets such as stocks, mutual funds, or property, you can reduce the amount of capital gains tax you may owe on the sale of those assets. This is because when you give away an asset, you are considered to have sold it at its fair market value on the date of the gift. So if you give away a stock that has increased in value since you bought it, you won’t have to pay any taxes on the profits from its sale.
However, to qualify for this tax break, your gifts must meet certain requirements. The most important requirement is that you must donate your assets to a qualifying charity and you must receive a receipt from the charity for your donation. The gift must be of property that is “readily convertible into cash.” This generally means stocks, mutual funds, or other investments. It does not include property such as your home or vacation property. Also, you must have owned the asset for at least one year before donating it.
Lifetime Capital Gains Exemption
The Lifetime Capital Gains Exemption (LCGE) is a Canadian tax measure that allows certain capital gains to be exempt from taxation. The LCGE was introduced in 1986 and has been increased several times since then, most recently in 2006.
The purpose of the LCGE is to encourage Canadians to invest in capital assets, such as businesses or real estate, by providing a tax incentive. By exempting a portion of capital gains from taxes, the LCGE makes investing more attractive and helps to encourage economic growth.
Capital Gain Reserve
Capital gain reserve (CGR) is a calculation used to determine the adjusted cost base (ACB) of shares or other capital property. The ACB is important because it’s used to calculate the capital gain or loss on the sale of those shares or other capital property.
The basic idea behind CGR is that it allows taxpayers to defer some or all of their Canadian capital gains tax by reinvesting all or a portion of their realized capital gains into new shares or securities. The deferred amount can then be used to reduce the amount of tax payable on any future disposition of those new shares or securities.
How To Use Capital Losses To Offset Capital Gains Tax In Canada?
It’s important to remember that you can use capital losses to offset Canadian capital gains tax. This means that if you have investment losses, you can deduct them from any capital gains you make to lower your overall tax bill. There are a few things to keep in mind when using this strategy:
- Capital losses can only be used to offset capital gains. If you have other income sources (such as employment income), capital losses cannot be used to reduce taxes on that income.
- Capital losses can only be used in the year they were incurred; they cannot be carried forward or backward to offset taxes in other years.
- You can only deduct the portion of your capital loss that represents your “net capital loss” for the year. This is the amount by which your total capital losses exceed your total capital gains.
- If you have a net capital loss in any given year, you can carry that loss forward indefinitely and use it to offset future capital gains.
- You can also elect to apply your capital losses against capital gains from any of the three previous taxation years. This is known as “carrying your capital losses back”.
Is There A Capital Gains Exemption In Canada?
There is a capital gains exemption in Canada, which allows Canadian residents to be exempt from capital gains tax. The exemption is available to both individuals and corporations. There are also a number of other conditions that must be met to qualify for the exemption.
Small Business Corporation Shares
The Canada Revenue Agency (CRA) states that shares of a small business corporation (SBC) are qualified property for the capital gains exemption if all of the following conditions are met:
- The SBC is a Canadian-controlled private corporation;
- At any time in the five years before the disposition, the corporation was not controlled by one or more non-resident persons;
- The shares were listed on a designated stock exchange at any time in the five years before disposition; and
- At least 90% of the gross income of the SBC for its taxation year ending immediately before the disposition was derived from active business income from sources inside Canada.
Qualified Farm Property
There are a number of different factors that can affect whether or not farm property is eligible for the capital gains exemption. First, the property must be used for agricultural purposes. This means that it must be used for farming activities such as growing crops or raising livestock. Secondly, the farm property must be owned by an individual farmer or family farm corporation. Lastly, the farm property must be located in a designated agricultural zone. To learn more about the requirements for the capital gains exemption, I suggest speaking to a professional tax advisor like at FShad Chartered Professional Accountants. We can help you take care of any taxes on capital gains so you don’t have to worry about an audit.
Qualified Fishing Property
The sale of a fishing property may qualify for the capital gains exemption if the following conditions are met:
- The property was used primarily for fishing purposes.
- You have owned and used the property for at least 24 months.
- You have claimed it as your principal residence for at least 24 months
- You file an election to treat the sale as a taxable disposition.
If you meet all of these conditions, you can claim a full capital gain exemption on the sale of your fishing property. If you don’t meet all of these conditions, you may still be able to claim a partial exemption.
Capital Gains Tax Canada Vs Business Income
There is a big difference between capital gains and business income. Capital gains are profits from the sale of investments, such as stocks, bonds, or real estate. On the other hand, business income is money earned from a company’s operations. It includes revenue from selling goods or services, as well as interest and dividends earned on investments.
Capital gains are taxed at a lower rate than ordinary income. The long-term capital gains tax rate is 15% for most taxpayers, while the short-term capital gains tax rate is your ordinary income tax rate. On the other hand, business income is taxed at your ordinary-income tax rate. This means that business owners pay more taxes than people who earn their income from capital gains.
How Does FShad Accountants Help?
Our accountants at FShad Chartered Professional Accountants can help you to reduce your capital gains tax liability on your real estate investment by doing the following:
Capital Gains Tax Planning
We can help you plan ahead for your capital gains tax liability. We will be able to advise you on the most tax-efficient way to sell your property, exchange it for another property, or transfer it to a family member. By planning ahead, you can minimize the amount of capital gains tax that you will have to pay.
Maximizing Deductions and Credits: Reduce Costs
FShad Chartered Professional Accountants can also help you to maximize the deductions and credits that you are eligible for. This can include things like expenses related to selling the property, such as advertising, real estate commissions, and legal fees. By maximizing your deductions and credits, you can lower the amount of capital gains tax that you will have to pay.
Capital Gains Tax Returns: Preparing the Form Correctly
We can also help you to prepare your capital gains tax return with the proper form. We will be able to accurately calculate your capital gain or loss, as well as any deductions and credits that you may be eligible for. They can also help you file your return and pay any taxes owed. A properly done tax return is crucial for anyone.
If you’re planning to sell your property, it’s worth talking to an accountant about ways to reduce the amount of tax you have to pay. Our professional accountants have extensive knowledge and experience navigating the complex tax code and can help identify potential deductions and strategies for reducing your tax bill.
Trying to do it yourself can be time consuming and complicated. We can save you valuable time and hassle. Additionally, knowing that you’re using a professional who is familiar with the latest changes in the tax code can give you peace of mind, knowing that you’re taking all possible steps to minimize your tax liability.
Bottom Line: Be Prepared For Capital Gains Tax in Canada
The sale of a capital property in Canada incurs a tax known as the Capital Gain Tax. This tax is applied to the difference between the selling price and the original purchase price of the capital property, minus any associated costs such as commissions and legal fees. These taxable capital gains are for any sale of property in Canada. If you are thinking about selling a capital property in Canada, it’s important to understand how this tax works and what steps you can take to minimize your liability. For more information or assistance with filing your taxes, please contact our team of experienced accountants at FShad Chartered Professional Accountants. We can help you understand how this tax applies to you and help you file your return correctly.
At FShad CPA we are committed to providing our clients with world-class service. Known for our professional development and tax accounting services, we provide services to numerous industries and associations across the GTA. In addition, we can help you navigate the complex world of capital gain tax in Canada. We are experts in all things taxation and would be more than happy to assist you with your filing this year. Contact us today for a consultation!
This publication is produced by FShad CPA Professional Corporation as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.