Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.
What is a capital gain or capital loss?
Before we dig into the weeds of capital gains in Canada, it’s important to note that everyone’s situation is unique. The general information below should not be taken as advice, and you should always consult a tax professional to determine what works best in your specific situation.
That said: in simple terms, a capital gain is an increase in the value of an investment (such as stocks or shares in a mutual fund) or in the value of an asset (a real estate holding, for example) from the original purchase price. If the value of your investment or asset increases, you have a capital gain and need to pay tax on it. That might sound bad, but trust us: making money on your investments is never a bad thing.
Capital gains can be “realized” or “unrealized.” A realized capital gain occurs when you sell the investment or asset for more than you purchased it for. An unrealized capital gain occurs when your investments have increased in value but you haven’t sold them. The good news is you only pay tax on realized capital gains. In other words, until you “lock in” the gain by selling the investment, it’s only an increase on paper.
There is also such a thing as a capital loss. A capital loss occurs when your investment or asset decreases in value. So, if you have sold an investment or asset for less than you bought it for, you have a capital loss. Capital losses like these can be used to offset capital gains, reducing the overall tax you will pay. If you only have capital losses, the Canada Revenue Agency (CRA) even allows you to use a capital loss to offset a capital gain you originally declared in the previous three years, and you can also carry it forward anytime into the future — so keep your paperwork.
If you have investments in registered plans such as a Registered Retirement Savings Plan, Registered Retirement Plan, or Registered Education Savings Plan, you don’t have to worry about capital gains or losses there, because those investments are tax-sheltered. That means your investments can grow and you don’t have to worry about any changes in their value until you withdraw the funds.
What is the capital gains tax rate in Canada?
Strangely enough, you won’t find “capital gains tax” mentioned in the official Income Tax Act. That’s because there’s no specific separate tax relating to your capital gains. Instead, you pay additional income tax on part of the gains that you make.
In Canada, 50% of the value of any capital gains are taxable. Should you sell an investment or asset at a higher price than you paid (realized capital gain), you’ll need to add 50% of that capital gain to your income. This means the amount of additional tax you actually pay will vary depending on how much you're making and what other sources of income you have.
How to calculate tax on a capital gain
Before you calculate your capital gains, you're going to need to figure out something called the adjusted cost base. It’s there to help you save money, and it sounds much scarier than it is. Simply put, the adjusted cost base is your original purchase price, adjusted to include any additional purchase fees.
Many financial institutions will track your capital gains and adjusted cost base for you, so there may be no need for you to calculate it yourself. That said, if you have a self-directed account and need to calculate tax on a capital gain, here’s how you calculate your adjusted cost base:
Adjusted cost base (ACB) = book value (the original purchase price of the investment), plus costs to acquire it, such as fees
Once you’ve calculated the adjusted cost base, you can figure out the amount of money you owe taxes on. The sum of money that’s taxable is the difference between the selling price of your asset and the adjusted cost base. Here’s how you calculate it:
Capital gain subject to tax = selling price (including all fees) minus the adjusted cost base
If you buy shares at different times in the same fund, you can have different ACBs, depending on the book value at the time of the transactions.
Sample calculation of tax on a capital gain
In the examples below, we’ll show you how to work out the tax on a capital gain. Remember, we start by calculating the adjusted cost base.
Adjusted cost base
As detailed above, for straightforward buys and sells, the adjusted cost base is the book value plus any commission that was paid to acquire the investment. For example, if you bought 100 shares of XYZ Company at a total cost of $500 and paid a $25 commission, your ACB would be $525: the price of the shares plus the commission.
Now, let’s say you buy more shares of XYZ Company, but the share price has increased. This time you buy 100 shares at a total cost of $700. You pay the same $25 commission. Your ACB for this transaction is $725.
When you eventually sell all or part of those investments, you will have no way of knowing what shares in your pot had which ACB. In this situation, you will need to figure out the average ACB per share. To get that, add your ACBs together and divide by the total number of shares you own.
Remember those shares in XYZ Company? You own 200 shares.
Add up the ACB for the two transactions: $525 + $725 = $1,250. Your ACB for your shares of XYZ Company is $1,250.
To find your ACB per share, divide your total ACB by the number of shares you own. $1,250/200 shares = $6.25. So, your ACB per share is $6.25. You’ll need this later to figure out if you made or lost money.
Say you decided to sell some shares in XYZ Company. Let’s call it 100 shares of XYZ Company once they reached $10 per share. There was a $50 brokerage fee. 100 x $10 = $1,000, minus the $50 fee = $950. This was your selling price.
To figure out if you made or lost money, you need to start with your ACB per share on your shares of XYZ Company. We calculated that as $6.25.
Multiply your ACB per share by the number of shares sold to get your ACB on the transaction. 100 shares x $6.25 ACB per share = $625.
Now, deduct the ACB from your sale price on those shares. $950 - $625 = $325. Since your sale price was more than your ACB, you’ve ended up with a capital gain.
You’ll need to pay tax on part of this capital gain. In Canada, 50% of the value of any capital gains is taxable. In our example, you would have to include $162.50 (50% of $325) on your income tax. The amount of tax you’ll eventually pay depends on how much you're earning from other sources.
While these calculations are simple enough, the good news is that most financial institutions will track your ACB and any capital gains for you, and send you a form that provides you with the information you need. (You could receive a T3 “Statement of Trust Allocations and Designations” for capital gains you earn in a mutual fund or Exchange Traded Fund, or a T5008 Statement of Securities Transactions for shares that you sell through a brokerage.) You report your capital gain in Schedule 3 of your T1 General Income Tax form, the form you already complete to file your income tax.
Let’s now look at an example of a capital loss. Imagine you purchased 100 shares for $6 per share, but sold them for $4 per share. You also had to pay a $50 brokerage fee when you bought and sold the shares. This led you to lose money — ouch! Here’s how to calculate your capital loss:
You decided to sell your 100 shares in XYZ Company, at $4 per share. There was a $50 brokerage fee. Multiply the number of shares by the price per share, and subtract the brokerage fee: 100 x $4 = $400 - $50 = $350.
Remember that your ACB per share is the basis of determining if you made or lost money. To calculate this, add your original purchase price plus the brokerage fee: 100 x $6 = $600 + $50 = $650.
Deduct the ACB from your sale price on those shares ($350 - $650 = -$300). Because your sale price is less than your ACB, you have a capital loss of -$300.
Dealing with capital loss
You can use any capital losses to offset (and, therefore, reduce) your capital gains. Even better, if you have any capital losses left over after reducing your capital gains to zero — or if you only have capital losses — you are allowed to carry forward that capital loss into any future years, or back as much as three previous years to offset any capital gains from that time. (To do this, you will need to amend your old income tax return, and may wish to consult a tax professional for assistance.)
Dealing with a capital gain
The 50% of your capital gain that is taxable (less any offsetting capital losses) gets added to your income, and is then taxed at your marginal tax rate based on your level of income and province of residence. The federal tax rates can be found on the CRA's website.
How to reduce or avoid capital gains in Canada
Donate assets to charity
When you make a donation to a registered charitable institution, you receive a tax receipt that allows you to deduct a portion of your donation from income tax owing. Instead of making a donation in cash, you can also transfer ownership of stocks to the registered charity (an “in Kind” transfer). This way, you rebalance your portfolio without triggering a capital gain, because you are not selling the stock but simply transferring ownership. (You will receive a tax receipt for the current fair market value, i.e., what the stocks would sell for on the day of the transaction.) We recommend consulting a tax professional before you do this so you follow the correct procedure.
Engage in tax-loss harvesting
As explained above, you have the ability to reduce your tax bill by offsetting capital gains with capital losses. “Tax loss harvesting” refers to the practice of selling your shares in low-performing funds in order to generate a capital loss where one didn’t previously exist. (Some investment platforms will track the performance of your investments and sell off the poor performers for you.)
Be warned: the CRA does not look favourably on investors who sell low performers at a loss, only to then buy them back a few days later. This “superficial loss” applies to assets that the CRA would consider “identical.” For example, you cannot sell a low-performing exchange-traded fund only to purchase a different one that tracks the same index within 30 days of the sale. You also couldn’t sell your shares in XYZ Company, then buy them back three weeks later. If CRA deems your transaction a superficial loss, you will not be able to use it to offset the capital gains. (You may also set yourself up for more scrutiny or even an audit in the future.)
Carry over losses to the next year
Remember, capital losses offset capital gains. If you have both capital gains and capital losses in the same tax year, use the losses to offset the capital gain. However, if you only have a capital loss, or you don’t have capital gains from the prior three years that you could amend and offset, you can carry those capital losses forward to offset future capital gains. You might need to consult a tax professional to follow the proper steps to do this.
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