Capital gains, capital losses—these are both income tax terms that sound like specialist jargon but are easy to understand when you break them down.
“Capital” is something that you own as an investment—like stocks, real estate, or a piece of art—and “gains” and “losses” are what you earn (or lose) when you sell it for more (or less) than it originally cost you.
Pretty simple, right? But wait, there’s more. Here are some key questions answered.
- When you earn a profit selling things like stocks, houses, and land, that profit counts as capital gains and is subject to tax.
- Capital gains tax is calculated by taking 50% of your capital gain and adding it to your taxable income.
- When you lose money selling capital property, those losses can help you reduce the tax payable on any capital gains.
What are capital gains?
Let’s say you got a really big bonus one year at work and decided to make a couple of investments: some shares in Big Awesome Company Inc. and a sweet little condo in downtown Montreal. Both of those items count as capital property: assets you own that are considered investments and can be sold later—ideally, for a profit.
Then let’s say that a few years later, you have a tougher year financially. It might be time to sell some of those shares to raise some cash. Good news: they’re way up in value and you sell them for far more than you paid. The result? Capital gains.
There are several types of capital property that incur capital gains when you sell them. Common ones include:
- Stocks and bonds
- Units of a mutual fund trust
- Land
- Buildings
- Equipment used for a business
- Cottages
- Antiques
Overall, capital gains are a good thing; it means that your investment has done well and you’ve earned money through profitable returns. But you also need to know that the CRA will expect its share, and that there’s also a flip side to capital gains, known as capital losses.
What are capital losses?
A capital loss, as you might have guessed, is when your investment loses value over time.
Let’s say, for instance, you also had to sell that condo in Montreal (our condolences). Unfortunately, the real estate market is down, and rather than making a profit like you did on the stocks, you lose money on the sale. This means that your asset is worth less than when you bought it, and is therefore a loss. Obviously, you want to avoid this as much as possible. But when investing, losses are sometimes unavoidable.
Thankfully you don’t get taxed when you experience a loss. Only capital gains are considered taxable. But this doesn’t mean you should forget about capital losses, as you can use them to offset taxable capital gains and reduce the amount of income tax you have to pay (which can come in really handy!).
What is a realized vs. unrealized capital gain or loss?
Basically, a capital gain that is realized is real: it has actually happened. A capital gain that is unrealized is still theoretical—it’s simply an estimate of your potential gains (or losses).
It’s when you make the sale that the capital gains happen. You sold your stocks, you no longer own that property, and you’ve (hopefully) made a profit. Your capital gains are realized.
Read more: Realized vs. Unrealized Capital Gains
How does capital gains tax work in Canada?
First off, understand that you only pay tax on realized capital gains. In other words, even if you estimate your land is worth more than you paid for it, you don’t have to pay tax until the land is actually sold and the capital gains are received.
In addition, don’t forget you only pay tax on profits, not on the total sale price. For example, if you sell your car, unless it’s the actual DeLorean from the first Back to the Future, chances are good you’re selling it for less than you paid. That means no capital gains, and no capital gains tax.
A few other key points to know:
- You pay tax on only 50% of your capital gains.
- The amount of tax payable depends on a number of factors, including your total income and your place of residence.
- A few things are exempt from capital gains tax, including your principal residence.
Also, don’t be too concerned about sales of small collectibles like that mint-condition, in-the-original-packaging ’80s Barbie doll on your shelf. (We hope you’re keeping it out of direct sunlight!) This item falls under personal-use property (PUP) and normally doesn’t trigger capital gains if it sells for less than $1,000. (There could be an exception to this rule if certain conditions are met.)
Read more: How Capital Gains Tax Affects Your Property and Investments—and Can It Be Avoided?
When is it time to pay capital gains tax in Canada?
You pay capital gains tax in the calendar year that your gains were realized. So if you sold your Big Awesome Company Inc. stock in 2023, you need to include those capital gains in your 2023 income.
What is the capital gains tax rate in Canada?
As mentioned above, you pay tax on only 50% of your capital gains. The other half is earned tax-free. For instance, if you sold some stocks and ended up with a profit of $5,000, you pay tax on half of that: $2,500.
It’s worth pointing out that this doesn’t mean you have to send $2,500 straight to the government. This is a common misconception. Instead, you pay a percentage of that amount—just like when you earn $2,500 in total income on your paycheque, but only pay a percentage of that in tax. How much that tax actually works out to depends on your personal tax situation.
How to calculate capital gains tax
Calculating a capital gain or loss can be simplified into this formula:
Amount earned from asset sale
– (amount spent on asset purchase + outlays and expenses)
= capital gain or loss
You calculate the tax payable based on the amount of the capital gain. To put it simply, half of your capital gain is taxable income. But how does this work in real life?
Example: calculating capital gains tax
For purposes of example, let’s say you own a stunning, beautifully crafted, and rare antique cabinet dating back to the 18th century. About 10 years ago, you paid $4 million for it, and now you’re ready to sell.
The original auction house is happy to put this antique back on the market for you, and they sell it to another collector for $5.5 million. But you have to pay them, your lawyer, and everyone else involved a total of $500,000 to make the sale go through.
Here’s how the math works out:
- Amount spent on asset purchase: $4 million
- Outlays and expenses: $500,000
- Total cost, aka adjusted cost base (ACB): $4 million + $500,000 = $4.5 million
- Profit: $5.5 million – $4.5 million = $1 million
That’s a cool mil in capital gains. Who knew cabinets were such a profitable investment? (Okay, maybe this isn’t such a realistic example, but it’s fun to dream.)
Remember that in Canada, we pay tax on only 50% of capital gains. So divide that profit in half and you end up with $500,000 in taxable capital gains. We’re guessing anyone trading in expensive antique furniture is in the highest tax bracket already, so if you made that sale in 2023, you probably have to pay 33% of that in federal tax plus whatever your provincial rate is for high-income earners.
In Nova Scotia, for example, that would be a total of 54%: 33% for the feds and 21% for the province. How much tax does that work out to? Let’s do the math:
$500,000 x 54% = $270,000
That seems like a lot. But remember, you got to keep half of the capital gains tax-free. So your total take-home earnings from selling your antique cabinet come to $730,000. In other words, you would end up paying 27% of your total capital gain in tax. Not a bad take-home for a piece of furniture.
Check out this video where our resident tax expert, Emily, breaks down how stocks are taxed in Canada as an example.
How do I claim capital losses?
If you sold your property and it lost value—that means it’s eligible for claiming a capital loss. You don’t want to forget about this. But how do you claim it?
Take for instance that stock in Big Awesome Company Inc. Let’s imagine you had to sell your shares at a loss (sorry!) and you end up with a capital loss of $5,000. You can use this $5,000 to offset capital gains on your income taxes for the same year and, if there’s any left over, on any of the three previous years or any future year. In other words, Canadian tax law lets you consider all of your investments in a group and calculate the tax payable on them together.
What capital gains aren’t taxed in Canada?
There are some instances where even when you earn capital gains—i.e., you sell capital assets for a profit—you don’t have to pay capital gains tax. These include:
- The sale of your principal residence (with some exceptions, like if you rented it out or used it for business).
- Capital gains on stocks if the CRA agrees that you earn your income as a day trader.
- The sale of qualified small business shares and farm and fishing property.
The way the CRA defines that last bullet is as a “qualified” sale. In other words, not every such sale is eligible for an exemption, but in certain circumstances it is.
When you sell CRA-qualified property (i.e., small business, farm, fishing property), the capital gains are not taxable to a point. This is the lifetime capital gains exemption (LCGE). It’s cumulative, meaning every such sale you make counts toward the limit. Once you’ve hit that point, you must pay capital gains tax on any further sales of this type.
The amount of this exemption limit goes up every year. For 2022, it’s $913,630 for small business shares and $1 million for farms and fishing shares. Keep in mind that those numbers are for the full capital gains, not the 50% of capital gains that are taxable.
How are capital gains different from interest and dividend income?
Interest, dividends, capital gains: they’re all ways to make money from investing, so you’d think they’d be taxed the same way, right? But no, the CRA treats them differently.
An important key word in capital gains is capital. Capital gains (or losses) happen when you own something and then sell it again.
Interest and dividends, though, are paid out while you still own that capital. There is no gain or loss because nothing has been sold. Tax-wise, they count as investment income.
Case example
Say you bought 100 shares in Big Awesome Company Inc. The company is profitable (they are awesome, after all) and every year, it pays shareholders a dividend: basically, a chunk of the profits. When that happens, you get a cash deposit into your account. This occurs while you still own your stock: you haven’t sold anything. Nice! That’s dividend income.
Similarly, if you’ve got $1,000 for emergencies sitting in a high-interest savings account (well done, you!), the bank will pay you a percentage every month. You haven’t done anything with that $1,000—it’s still sitting there—but it’s sitting there making sweet, sweet cash. That’s interest.
Capital gains are different. In order to earn capital gains, you have to sell something. (Technically, there are a few different scenarios that mean “sold”, but the key point is you don’t own it anymore.)
Back to Big Awesome Company Inc., those 100 shares you own are considered capital property. As soon as you sell them—even just one of them—you trigger capital gains. That’s different from interest or dividend income because you sold capital.
Take the easy street to capital gains taxes: File with TurboTax Canada
If you’re still trying to make sense of your capital gains for the tax filing season, TurboTax has your back. With TurboTax Full Service, you’ll get access to step-by-step guidance on capital gains and losses while filing. Whether you’re looking at capital gains from stocks, bonds, crypto, or rental property income, we’ve got everything you need to file the right forms and maximize your return.
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