Everything you need to know about capital gains tax in Canada

“Capital gains” is a term used to refer to the profits from the sale of capital assets, which are generally properties or investments. A capital gain occurs when you sell an asset for more than you paid for it. If you bought stock for $1,000 and sold it for $1,500, you’d have a capital gain of $500 (minus any expenses incurred).

Unsold capital assets are considered “unrealized” capital gains, and it's only after the sale that they become “realized” and therefore subject to capital gains tax.

Similarly, when you sell investments like stocks (or mutual funds or ETFs), the profit you make after expenses is considered your capital gain, and is subject to the capital gains tax.

Capital gains taxes are aimed at investments, which is why your primary residence is exempt even though it may increase in value. But profit from the sale of investment or vacation properties and land is subject to the capital gains tax.

Although property and investments are the most common capital assets, other less obvious assets may trigger the capital gains tax. Valuables like artwork, jewelry and collectibles may also be subject to this tax — if you make more than $1,000 in profit.

In Canada, capital gains are taxable. The capital gains tax is the tax you pay on the profit you make from the sale of a capital asset. If you sell your vacation property, the profit you make will be subject to the capital gains tax.

If you sell a capital asset for less than you paid for it, you have a capital loss. You can claim this loss on your taxes.

The inclusion rate is the share of your capital gains that are included in calculating your income for tax purposes — and therefore taxable.

The capital gains tax has been in the news a lot this year because of changes introduced in June. 

What this means:

If you have a capital gain of $250,000 or more in a single year, you have to report 66.67% of that gain as income on your income tax return. That portion is taxable at your regular tax rate. The other third is yours, tax-free.

Let’s say, for example, that you sell your vacation property and realize a capital gain of $300,000 after June 25, 2024.

The first $250,000 would effectively be included at a one-half inclusion rate (taxable capital gain of $125,000). The remaining $50,000 would be included at the basic two-thirds inclusion rate (taxable capital gain of $33,333). Therefore, the total taxable capital gain to be added to your income taxed at marginal rate would be $158,333 – $141,667 would be yours, tax free.

But let’s say you realized capital gains of $300,000 before June 25, 2024, then the old rules would apply and the whole $300,000 would be included at a one-half inclusion rate, therefore, your taxable capital gain would be $150,000.

For this purpose, it is important to identify capital gains arising before and after 25^th June 2024.

No. The inclusion rate only says how much of your capital gain will be taxed. For gains over $250,000, the rate is 66.67%; it’s 50% if your gains are under that.

In this case, there are no changes for you. Your inclusion rate — the percent of your gains that will be taxed — stays at 50%. So, for example, if your capital gain is $200,000, then $100,000 would be yours, tax-free, and the other $100,000 (50%) would be added to your annual income and taxed at your regular tax rate.

There is no standard capital gains tax rate. Instead, the amount of tax you’ll pay depends on your income and, therefore, your tax bracket – the more you earn, the higher your tax bracket.

Let’s take a look at how to calculate your capital gains (and losses).

There are three figures you’ll need to calculate your gains or losses.

1. Adjusted cost base (ACB): This number is the cost incurred in buying the asset. It’s the price you paid, plus any fees, such as for lawyer fees or commissions. In real estate, closing costs are part of the ACB.
   
   
2. Outlays and expenses: These are costs associated with selling the asset and could include renovations, transfer taxes and legal fees.
   
   
3. Proceeds of distribution: This is a formal way of saying profit. It’s the value of your asset at the time you sold, minus the ACB and any outlays and expenses.

If you’re unsure about your calculations, you can check the Canada Revenue Agency (CRA) website for details.

The change in the capital gains inclusion rate will affect corporations and trusts and individuals realizing significant capital gains of more than $250,000.

People with a high net worth may be affected by the new inclusion rate. If you receive more than $250,000 in capital gains on an annual basis, this change will be significant.

Other individuals who may be affected are those looking to sell off high-value investments or property, like vacation homes. The sale of your principal residence is exempt from this tax.

Finally, the capital gains tax can affect inheritances, as investments and properties are considered capital gains upon death. 

The June 2024 change to the inclusion rate was designed to affect corporations, trusts, and high-income earners, but all Canadians are subject to the capital gains tax (or loss) when they sell a capital asset. Those who realize a capital gain of less than $250,000 are subject to a 50% inclusion rate. So, how do you minimize your capital gains tax bill — or avoid one all together?

Registered investment accounts — like registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs),  registered education savings plans (RESPs) or first home savings accounts (FHSAs) — are tax- sheltered, which means that any dividends or compound interest earned is tax-free. Funds withdrawn from a TSFA are also tax-free. For RRSPs and RESPs, tax is taken when you make a withdrawal, but at a lower tax rate.

The taxable portion of your capital gains is treated like income, and the higher your income, the higher your taxes. If you have contribution room left in your RRSP, you may be able to deposit some of your capital gains proceeds. This way, you reduce your taxable income.

When you sell a capital asset for less than you bought it for, you have a capital loss. You can use these to offset your gains and reduce your tax bill by claiming them as a credit. Capital losses don’t expire — you can claim them indefinitely into the future, or use them to offset gains in the previous three years.

Your principal residence is exempt from the capital gains tax.

To claim this exemption, make sure:

• You own the home, alone or jointly
• You've designated the property as your principal residence with the CRA
• You (and/or your spouse, common-law partner or kids) inhabit the home
• You haven’t claimed any other property as your principal residence

When you pass away, there are processes that automatically begin in order to finalize your estate. Two items that will be impacted are investments and properties that you may hold, which may be subject to capital gains tax. To ensure a smooth transfer of your assets to your heirs, you should have a will in place.

A Scotiabank advisor can work with you to create a customized financial plan complete with recommendations that include registered investment accounts that are tax-sheltered. For specific tax advice, you should speak with a tax professional to ensure your individual circumstances are taken into consideration and appropriately planned for.