Capital gains can be an afterthought after selling your home, or any property, stocks or shares. But it sure comes up around tax time.
What are capital gains?
You have a capital gain when you have sold, what the Canada Revenue Agency deems “capital property” (including securities in the form of shares and stocks as well as real estate, like a cottage) for more than you paid for it (called the adjusted cost base) less any legitimate expenses associated with its sale.
How are capital gains taxed?
Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep. (There are rumours that the rates capital gains taxes may change due to the COVID pandemic.)
To calculate any capital gain or loss on recently sold property/stocks, according to the CRA, you need the following amounts:
- Proceeds of disposition: How much you sold price of the capital
- Adjusted cost base (ACB): How much you originally paid for the capital
- Outlays and expenses: Costs deemed necessary before selling, such as fixing-up expenses, finders’ fees, commissions, brokers’ fees, surveyors’ fees, legal fees, transfer taxes and advertising costs
Proceeds of disposition – (ACB + outlays and expenses) = capital gain/loss
How to keep more of your capital gains for yourself
There are several ways to legally reduce, and in some cases avoid, capital gains tax. Some of the more common exceptions are detailed here:
- Capital gains can be offset with capital losses from other investments. In the case you have no taxable capital gains however, a capital loss cannot be claimed against regular income except for some small business corporations.
- The sale of your principal residence is not subject to capital gains tax. For more information on capital gains as it relates to income properties, vacation homes and other types of real estate, read Capital gain strategies.
- A donation of securities to a registered charity or private foundation does not trigger a capital gain.
- If you sell an asset for a capital gain but do not expect to receive the money right away, you may be able to claim a reserve or defer the capital gain until a later time.
If you are a farmer or a newcomer to Canada, they are special capital gains rules for you. The specifics can be found at the CRA website.