In Guide
Capital Gains Tax in Canada
In 2024, changes were made to capital gains tax in Canada. For gains over $250,000, the inclusion rate changed to two-thirds, while the rate for gains under $250,000 stayed the same at 50%.
This change aims to make the tax system more fair by distributing the tax load more evenly among different types of income and assets.
This article will discuss capital gains tax in Canada, how it affects different assets, and ways to lower your tax bill. These rules can have a big impact on your financial planning, whether you’re selling stocks or real estate.
Understanding Capital Gains Tax in Canada
Capital gains tax is levied on the profit you make when you sell a capital asset, such as stocks, bonds, real estate, or certain collectibles. Unlike some countries, Canada does not have a separate capital gains tax rate.
What is Capital Gains Tax?
Capital gains tax is charged on the extra money you make when you sell something for more than you paid in Canada. This includes a wide range of assets, such as stocks, bonds, and real estate. From this, only portions of capital are taxable. As of June 25, 2024, the inclusion rate is:
- 50% for capital gains up to $250,000
- 67% for capital gains exceeding $250,000
This means that only half of your capital gain is added to your income and taxed at your marginal tax rate.
History of Capital Gains Tax in Canada
In 1972, Canada implemented a more comprehensive income tax reform. One goal was to make taxation more equitable and to provide the government with the revenue it required. The capital gains tax was one component of this reform.
At first, capital gains were included in taxable income at a rate of fifty percent, which meant that fifty percent of the gain was subject to taxation. This inclusion rate has seen certain modifications throughout the years, but the fundamental premise has stayed substantially unchanged.
The tax was a response to the government’s need to manage deficits and fund social programs, particularly during times of economic distress, which were particularly difficult to handle.
Why is Capital Gains Tax So High in Canada?
People think that Canada’s capital gains tax is high. This is mostly because the country wants to ensure that income from capital gains is taxed the same way as income from other sources, like pay. This is done to keep the tax system fair and balanced.
The goal of this method is to ensure that building wealth through capital gains doesn’t become much better than earning money through wages or salaries.
Recent changes have changed the rate at which capital gains are included to make the system more income-neutral. This means that capital gains are no longer taxed more favourably than other types of income.
Current Capital Gains Tax Rates in Canada
Canada’s capital gains tax system is a two-tiered structure with federal and provincial rates. Here’s a breakdown of the current situation:
Federal Rates
As of June 25, 2024, the federal capital gains inclusion rate is no longer a flat 50%. It now applies a graduated system:
- 50% of capital gains are included in your income for tax purposes, up to a threshold of $250,000.
- 67% of capital gains exceeding $250,000 are included in your income for tax purposes.
This means the effective federal capital gains tax rate you pay depends on the total amount of your capital gains.
Provincial Rates
It’s important to note that provinces add their surcharge on the federal inclusion rate. These rates vary by province. Here’s a general overview:
- Most provinces have a capital gains tax rate between 0% and 16%.
- Some provinces, like Alberta and Saskatchewan, have no provincial capital gains tax surcharge.
New Capital Gains Tax Rates in Canada for 2024
The recent federal budget changes don’t affect provincial tax rates. However, the combined federal and provincial rate for high earners with capital gains exceeding $250,000 has increased.
Read our guide on Canadian Sales Taxes across different provinces to calculate your taxes efficiently.
How Capital Gains Tax Works in Canada
To manage your capital taxes, you must know how to calculate capital gains taxes, the calculation of tax gains, and the tools that can calculate the taxes. Let’s check down the whole things with examples:
Calculation of Capital Gains in Canada
The capital gain you need to report on your tax return is the difference between the proceeds from selling a capital asset and its adjusted cost base.
- Proceeds: This is the selling price you receive when you dispose of a capital asset.
- Adjusted Cost Base (ACB): This represents the asset’s original purchase price, plus any additional costs associated with acquiring it. It may also be adjusted for depreciation over time.
Here’s the formula to calculate your capital gain:
Capital Gain = Proceeds – Adjusted Cost Base (ACB)
Examples of Calculations
Let’s look at a couple of scenarios to illustrate the calculation:
- Scenario 1: You buy shares of a company for $1,000 and sell them two years later for $1,500. There were no additional costs associated with the purchase.
Capital Gain = $1,500 (proceeds) – $1,000 (ACB) = $500
- Scenario 2: You purchase a used car for $8,000. You pay an additional $200 in registration fees. After five years of ownership, you sell the car for $6,000.
Adjusted Cost Base (ACB) = $8,000 (purchase price) + $200 (registration fees) = $8,200
Capital Gain = $6,000 (proceeds) – $8,200 (ACB) = -$2,200 (capital loss in this case)
Tools for Calculation
Several online tools and investment calculators can help you estimate your capital gains. However, consulting a tax professional for personalized advice is important, especially for complex situations. They can help you determine your ACB accurately and ensure you’re filing your taxes correctly.
Capital Gains Tax on Different Assets in Canada
To make smart financial choices, you must know how capital gains tax affects different assets. As there are so many different assets, let’s just learn about real estate, stock and securities, foreign properties, and how the corporate capital gains taxes.
You can also learn about Property Taxes in Toronto Ontario with our detailed guide.
Real Estate
- Primary residence exemption: Your principal residence generally qualifies for a capital gains tax exemption when you sell it. This means any profit you make on the sale is not subject to capital gains tax.
- Capital gains tax on rental and second properties: Profits from selling rental properties or secondary residences are subject to capital gains tax. The full capital gain is included in your income and taxed at your marginal tax rate.
- Strategies to minimize tax on real estate: There are strategies to minimize capital gains tax on real estate, such as claiming a capital cost allowance (CCA) for depreciation on rental properties. However, for personalized advice, it is recommended that you consult a tax professional.
Stocks and Securities
- Taxation of capital gains on stocks: Capital gains on stocks are subject to the same inclusion rates as other capital assets. It can be 50% up to $250,000 and 66.67% above that.
- Impact of short-term vs long-term holdings: Canada does not differentiate between short-term and long-term capital gains on stocks. Both are taxed at the same rate.
Foreign Property
- How are capital gains on foreign property taxed?
Capital gains on foreign property are generally reported on your Canadian tax return and subject to capital gains tax.
- Avoiding double taxation: Canada has tax treaties with many countries to prevent double taxation on capital gains. You may receive a foreign tax credit to offset any taxes paid on the sale in another country.
Corporate Capital Gains
- How capital gains are taxed in a corporation?
Corporations pay a separate capital gains tax rate on a portion of their capital gains. This rate is generally lower than the top marginal tax rate for individuals.
- Differences from individual taxation: Corporate capital gains tax is calculated differently than for individuals. Corporations may also have access to specific deductions not available to individual investors.
Strategies to Minimize or Avoid Capital Gains Tax in Canada
While capital gains tax is a reality in Canada, there are strategies you can employ to minimize its impact or even avoid it altogether. Here’s a look at some effective techniques:
Utilizing Tax Exemptions
Primary Residence Exemption: This is a powerful tool. Selling your principal residence generally qualifies for a full exemption from capital gains tax.
Tax Deferral Strategies
Invest in Registered Accounts: Consider holding your investments within registered accounts like RRSPs, TFSAs, or RESPs. Capital gains generated within these accounts are not taxed until withdrawal or not taxed at all.
Tax Shelters and Accounts
Capital Gains Deferral: Explore options like capital gain reinvestment accounts for qualified small business investments. These allow you to defer capital gains tax until you sell the new investment.
Specific Strategies for Real Estate
- Capital Cost Allowance (CCA): For rental properties, claim CCA to reduce taxable income by factoring in depreciation over time.
- Spousal Transfers: Consider transferring ownership of appreciated property to your spouse to potentially reduce the overall capital gains tax burden when eventually sold.
Impact of New Capital Gains Tax Rules in Canada (2024)
The 2024 federal budget introduced significant changes to Canada’s capital gains tax system. Understanding these modifications is crucial for anyone with investments or property holdings.
Here’s a breakdown of the key changes and how to plan for the future:
Key Changes in the 2024 Federal Budget
- Graduated Inclusion Rate: Introducing a graduated inclusion rate is the most significant change. Previously, a flat 50% of capital gains were included in income for tax purposes. Now, the rate is:
- 50% for capital gains up to $250,000
- 67% for capital gains exceeding $250,000
This means high earners will pay more tax on a larger portion of their capital gains.
- No Change to Provincial Rates: It’s important to remember that the federal changes only affect the federal portion of the capital gains tax rate. Provincial rates remain unchanged so that the overall impact will vary depending on your province of residence.
Planning for the Future
With the new capital gains tax rules in effect, here are some considerations for navigating your financial future:
- Review Your Investment Portfolio: Analyze your investments and identify potential capital gains tax liabilities. Consider if there are opportunities to rebalance your portfolio or harvest tax losses to offset future capital gains.
- Tax-Efficient Investment Strategies: Explore tax-advantaged investment options like RRSPs, TFSAs, or CGRIs. These accounts allow you to shelter your investments from capital gains tax or defer it until withdrawal.
- Consult a Tax Professional: The new rules can be complex, and the best approach will depend on your unique financial situation. Consulting a qualified tax professional is highly recommended. They can help you develop a personalized tax strategy that minimizes your capital gains tax burden and maximizes your after-tax returns.
Filing and Paying Capital Gains Tax in Canada
Your Canadian tax return reports Capital gains on Schedule 3, Capital Gains. You’ll need to gather specific information for each capital disposition:
- Description of the asset: Specify the type of asset you sold such as stocks, real estate, etc.
- Proceeds of disposition: This is the selling price you received.
- Adjusted Cost Base (ACB): This represents the original purchase price plus any associated costs and adjustments, such as depreciation, for specific assets.
- Date of disposition: The date you sold the asset.
The Canada Revenue Agency (CRA) provides detailed instructions and resources on completing Schedule 3. You can file your tax return electronically or by mail.
Payment Options
The capital gains tax you owe is due with the rest of your taxes on the same deadline, usually April 30th of the following year. Here are some ways to make your payment:
- Online banking
- Credit card
- Pre-authorized debit (PAD)
- Cheque or money order
Misconceptions
- Capital gains tax is a separate tax!
Clarification – It’s part of your income tax, applied to a portion of your capital gain. - Only high earners pay capital gains tax!
Clarification – The rate depends on the total amount of your capital gain, not just income. - Selling your principal residence always triggers capital gains tax!
Clarification – Your principal residence generally qualifies for a full exemption.
Conclusion
With the changes made in 2024, Canada’s capital gains tax system has changed a lot. High-value gains are now taxed in a more fair way. This change shows how important it is to plan your finances carefully and spend tax-aware.
Common Questions and Misconceptions About Capital Gains Tax in Canada
Canada has a graduated capital gains tax rate. As of June 25, 2024, 50% of capital gains are taxed if up to $250,000 and 66.67% of capital gains are taxed if they exceed $250,000.
The rate depends on the amount of your capital gain. It's either 50% or 66.67%.
You only pay tax on a portion of your capital gain. This portion is then added to your income and taxed at your marginal tax rate. There are also exemptions and strategies to reduce your capital gains tax burden.
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Jahangir Alam
As the Business Development Officer at Mi Property Portal, Canada's premier property management software provider, I've been fueling our growth and forging key partnerships since May 2016. Our mission? To deliver an all-in-one property management platform that's efficient, effective, and cost-cutting.