What is the Capital Gains Tax?
The Capital Gains tax is due to the Canada Revenue Agency (CRA) when you sell an asset or investment for more than you paid – with a percentage of the difference being added to your regular income.
There are some ways to reduce the amount of Capital Gains tax that you have to pay:
- Choose the right time to sell investments
- Give away assets as donations or gifts
- The lifetime capital gains exemption
How Canada’s Capital Gains Tax works
You have to declare capital gains when you sell property or investments for more than you paid. The inclusion rate for the capital gains tax is the same for everyone, but the amount of tax you pay depends on your total income, personal situation and your province of residence. As of 2018, the capital gains inclusion rate is 50%
For example, with a capital gains inclusion rate is 50%, if you bought shares for $10,000 and sold them for $15,000, you have to declare a $5,000 capital gain in the year you sold the shares.
When to Sell Properties and Investments
While you can open registered accounts to shelter investments and use the principal-residence exemption to reduce capital gains tax on residential property, choosing the time of sale for your other investments can be a powerful tax reduction tool.
If you’re planning to sell investments that have made a profit, consider postponing the sale until after January 1st of the next year. You will incur capital gains tax that year and only have to pay by April 30th of the following year.
If your income varies, selling during a year when it is low may save you money. If you have investments that have lost money, selling them in the same year as profitable ones lets you apply the loss against the profits and reduce your overall capital gains tax.
Giving Away Assets
If you make regular charitable donations or want to give money to family members, you can use donations or gifts to reduce your capital gains tax. For example, if you plan to make a $1,000 donation to a charity, you can donate stock which has a value of $1,000 but which originally cost you much less.
Rather than selling the stock, paying capital gains tax and adding cash to make up the $1,000 donation, making the donation in stock entitles you to the $1,000 charitable receipt for tax purposes, while not triggering capital gains tax.
Gifts to family members trigger capital gains tax, because the CRA deems a gift to be a taxable disposition of an asset. Despite this, you could save money by giving an asset that has generated a loss, but that you want to keep in the family.
Gifting the asset produces a capital loss that you can apply to gains from other investments, while your family member reaps the future benefits of it.
Lifetime Capital Gains Exemption
If you own a business or operate a farm or fishing property successfully over an extended period, it may increase in value and you may, at some point, want to sell it. When this is the case, you would incur substantial capital gains tax.
The lifetime capital gains exemption, which as of 2017 is $835,716 for small business corporation shares – $1,000,000 for qualified fishing and farming properties, is aimed at reducing the amount of this tax. Canadian residents who operate active businesses, farms or fishing properties and whose business is primarily Canadian, may reduce their capital gains by the amount of the exemption when they sell these businesses or properties.
For example, if you sell your business for $2 million and your adjusted cost base representing the amount of capital you have invested is negligible, you have a $2 million capital gain. You deduct your exemption of $835,716 to get a $1,164,284 taxable capital gain. The inclusion rate for 2017 and subsequent years is 50%, so you add half of that gain ($582,142) to your total income for the year.
Because businesses have to use at least 90% of their assets in an active business operating primarily in Canada to qualify, consider selling the business at a time when it can fulfill these requirements. To qualify for the farming or fishing property exemption, you must be able to show that farming was your primary source of income or that you operated a fishing business.
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