What is capital gains tax?
Capital gains tax is a fee you pay based on the increase in the value of an investment (such as stocks or shares in a mutual fund) or the value of an asset (a real estate holding, for example) from the original purchase price. If you sell an investment or asset for more than the original purchase price (which is what most of us are after), you have a capital gain and need to pay tax on it.
Capital gains are often described as “realized” or “unrealized.” A realized capital gain is what you have when you actually sell an investment or asset for a profit. An unrealized capital gain occurs when your investments have increased in value, but you haven’t sold them. They certainly make you feel good, but you aren’t going to be taxed on them until you sell.
One important thing to note up front: everyone’s situation is unique, and that you should always consult a tax professional to determine what works best in your specific situation.
What is a capital gains loss?
A capital loss occurs when an investment or asset has decreased in value since you purchased it. If there’s a silver lining to capital losses, it’s that they can be used to offset capital gains, reducing the overall tax you will pay.
In fact, if you have only capital losses, the CRA allows you to use those losses to offset any capital gain not just that year, but in any of the previous three years. You can also carry a net capital loss forward anytime into the future.
What is the capital gains tax rate in Canada?
In Canada, there’s no specific separate tax relating to your capital gains. Instead, you pay additional income tax (at your marginal rate) on a portion of your capital gains.
Currently, you pay tax on 50% of your capital gains, no matter what your total gains are. As of June 25, 2024, however, you will be taxed on 50% of your annual capital gains up to $250,000. For any capital gains over $250,000, that ratio increases to two-thirds, or approximately 66.67%. Here’s how that would look in real life: Suppose one year you sell stocks for $300,000 more than you paid for them. 50% of the first $250,000 of those gains ($125,000) would be taxed as income. 66.67% of the remaining $50,000 ($33,335) would be taxed as well. So on the $300,000 gain, only $158,335 counts toward your taxable income.
For corporations and trusts, there’s no such threshold: regardless of the total capital gains, 66.67% are taxable. So in that same example, if a trust made $300,000 selling stocks for the year, 66.67% of that $300,000 ($200,000) would be taxed.
How to calculate tax on a capital gain
Before you calculate your capital gains, you're going to need to find something called your adjusted cost base, or ACB. It’s there to help you save money, and fortunately it’s easy to calculate. ACB is just your original purchase price, adjusted to include any additional purchase fees.
For example, say you bought 40 shares of $KALE for $10 each. One month later you bought 20 more shares at $12.50 each. At that point, your cost base for the purchase would be: [40 (the number of shares you bought in the first round) x $10 (the price you paid per share)] + [20 (the number of shares you bought the second time) x $12.50 (their cost per share)]
= $650
Your cost basis per share would be $650/60 total shares, or $10.83.
If, later that year, you decided to sell 30 shares of $KALE for $15 each, you would receive $450 from your broker (minus any fees). That amount is not capital gains (aka profit), however. To find your capital gains, you need to subtract the amount you spent (that ACB of $10.83 x 30 shares, or $324.90) from the proceeds of the sale ($450). $450 - $324.90 = $125.10.
Many financial institutions will track your capital gains and adjusted cost base for you, so there may be no need for you to calculate it yourself. That said, if you have a self-directed account and need to calculate tax on a capital gain, remember that the sum of your money that’s taxable is the difference between the selling price of your asset and the adjusted cost base.
How to reduce or avoid capital gains in Canada
You may not be able to fully avoid paying capital gains tax, but there are strategies you can use to reduce what you owe:
Option 1: offset your capital gains with capital losses
Remember, capital losses offset capital gains. If you have both capital gains and capital losses in the same tax year, use the losses to offset the capital gain. If you only have a capital loss, and you don’t have capital gains from the prior three years that you could put it towards, you can carry those capital losses forward to offset any future capital gains.
Option 2: put your earnings in a tax shelter
Tax shelters are legal ways to shield your investments. As long as your investments remain inside of them, you can buy and sell stocks at your leisure, with no tax consequences. Examples of tax-sheltered investments include registered plans such as a Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Locked-In Retirement Accounts (LIRAs), and Registered Education Savings Plans (RESPs). If you have any of these, you don’t have to worry about their capital gains or losses until you withdraw your funds.
Option 3: donate assets to charity
When you make a donation to a registered charitable institution, you receive a tax receipt that allows you to get a credit for a portion of your donation from income tax owing. Instead of making a donation in cash, you can also transfer ownership of stocks to the registered charity (an “in-kind” transfer). This way, you rebalance your portfolio without triggering a capital gain, because you are not selling the stock but simply transferring ownership. (You will receive a tax receipt for the current fair market value, i.e., what the stocks would sell for on the day of the transaction.) We recommend consulting a tax professional before you do this so you follow the correct procedure, or ask the charity directly since there can be some steps involved for them to receive stock donations (if they’re able to).
Option 4: engage in tax-loss harvesting
“Tax-loss harvesting” refers to the practice of selling shares you have in low-performing funds, allowing you to generate a capital loss where one didn’t previously exist that can be used to offset a capital gain. (Some investment platforms will even track the performance of your investments and sell off the poor performers for you.)
Be warned: the CRA does not look favourably on investors who sell low performers at a loss, only to then buy them back a few days later. This “superficial loss” applies to assets that the CRA would consider “identical.” For example, you cannot sell a low-performing exchange-traded fund only to purchase a different one that tracks the same index within 30 days of the sale. You also couldn’t sell your shares in a company, then buy them back three weeks later. If the CRA deems your transaction a superficial loss, you will not be able to use it to offset the capital gains. You may also set yourself up for more scrutiny or even an audit in the future.
Option 5: co-own your assets with a partner
If you or your partner sell a secondary property that is in only one of your names for a capital gain of over $250,000, 66.67% of the gain will be subject to tax. However, if you were both co-owners of the same property, that total gain could be divided between the two of you, bringing the amount that would be taxed back down to just 50%, as long as each individual’s total annual capital gains remained under the $250,000 threshold.
