What are capital gains?
A capital gain is any profit made from the sale of an investment asset. The gain is the difference between how much you paid for an investment and how much you received when you’ve sold it and realized a profit. Depending on your circumstances, the Canada Revenue Agency (CRA) will likely require you to pay some tax on your gain.
What is a capital loss?
In contrast to a capital gain, a capital loss happens when you sell your investment for less than you bought it for. You can use these losses to offset capital gains on your tax return, but not other types of income you’ve received.
In cases where you have more capital losses than gains, the CRA will let you carry capital losses forward to future tax years or even apply them to capital gains from the previous three tax years.
» MORE: How to start investing
What is capital gains tax in Canada?
Capital gains tax is the fee you pay on the profits made from selling an asset. Generally, capital gains taxes apply to any assets purchased as investments with the goal of earning income.
When is capital gains tax applied?
Capital gains tax usually applies after you sell investments such as stocks, bonds and mutual funds held in non-registered accounts. It can also apply when you sell property other than your principal residence, including investment properties such as a cottage or even a piece of land.
Your obligation to pay capital gains tax takes effect once you’ve realized the capital gain, which means after the asset has been sold, so it’s clear how much of a gain you earned.
How much is capital gains tax in Canada?
When you sell an investment, 50% of your gain is considered taxable and will be taxed at your marginal tax rate based on your income. The other half is not taxable — unless the CRA considers you a day trader. In that case, 100% of your profits will be considered business income, and you’ll be taxed at your current tax rate.
After you’ve sold an investment, you’re required to calculate your capital gain and report it as income to the CRA on your tax return (via form 5000-S3 Schedule 3) for the tax year in which you sold the asset.
If your investment was in a mutual fund trust or exchange-traded fund (ETF), your financial institution or broker will issue you a T3 tax slip detailing the amount of capital gain.
How to calculate a capital gain
As the CRA notes, there are three amounts you need to know before calculating a capital gain or loss:
- The proceeds of disposition: How much you received when you sold the asset.
- The adjusted cost base (ACB): The cost of the asset plus any expenses you paid to acquire it, such as commissions.
- Any expenses incurred to sell your property.
When you have those amounts, here’s the calculation to figure out your capital gain:
Proceeds of disposition – (ACB + expenses incurred to sell property) = capital gain
For example, let’s say you decided to start investing in stocks and purchased 100 shares of Company XYZ for $20 per share five years ago and paid a $50 commission. The amount you initially paid was $2,000 and the ACB, including the commission, was $2,050.
When you sold the 100 shares this year, you received $50 per share and paid a $50 commission. The total amount you received when you sold the shares was $5,000.
Your capital gain is $5,000 – ($2,050+50) = $2,900.
You would then report half of that amount, or $1,450, as your taxable capital gain.
How to avoid capital gains tax
Using a registered account
One way to avoid or minimize capital gains tax is to hold investments in registered accounts, such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA), rather than in a non-registered account.
In a registered account, your investments — as well as any gains, interest or dividends they generate — can grow and be withdrawn either on a tax-free basis (in a TFSA) or on a tax-deferred basis (in an RRSP).
» MORE: How to invest in a TFSA
Tax loss harvesting
In some cases, you may also be able to offset your capital gains by using capital losses to help reduce your capital gains tax payable through a strategy called tax loss harvesting. In this strategy, you’d sell an investment that has fallen below its original purchase price, triggering a capital loss. You will then apply this loss to another investment that is likely to generate a capital gain, reducing the total amount you owe in capital gains tax.
Donating investments, such as gifts of shares or units of a mutual fund, is another way to reduce or eliminate your capital gains tax. Investments donated to a registered charity are not subject to capital gains tax or required to be included as income on your tax return. You’ll even receive a charitable tax credit for your donation.
Claiming a dividend tax credit
Dividends are taxed differently than capital gains. Dividend income is added to your taxable income and includes a gross-up amount of 38% on eligible dividends and 15% on non-eligible dividends. You can claim the non-refundable federal dividend tax credit to offset the taxes you’ll have to pay on the gross-up amount.
Each year, you’ll have to report the taxable amount of eligible dividends and the dividend tax credit on your income tax return. Your broker or financial institution will issue you a T5 Statement of Investment Income detailing these amounts before tax time.
Frequently asked questions about capital gains tax
Any profit earned when you sell stock outside a registered plan is a capital gain, and half of that profit will be taxed at your marginal tax rate.
Investors must report capital gains to the CRA on their tax returns for the tax year in which they sold the stock.
Yes, 50% of your capital gain is considered taxable and will be added to your income for the year. You will be taxed on that amount at your individual tax rate.
How to Start Investing: 6 Steps for Beginners
To start investing in Canada, first determine your strategy, compare investment platforms and prepare to open and fund an account.
Understanding Fixed-Income Investments
Fixed-income investment products, such as GICs, bonds, and money market instruments, guarantee a set rate of return for a specified term.
What are Canada’s Tax Brackets?
Canadian tax brackets determine the annual tax rate you’ll pay. Tax brackets may vary by your income and location.
What Is Income Tax?
Income tax is the portion of annual earnings that’s paid to the government. Canada’s graduated income tax system means your tax rate depends on your income.