Capital Gains Tax in Canada

How capital gains tax in Canada works

Capital gains tax in Canada is not a separate tax. When you sell an investment or property for more than you paid, half of the profit is added to your income for the year and taxed along with your salary and other income. The other half is tax-free.

You only pay tax when you sell, or are treated as having sold, an asset. A stock that doubles in value but that you still hold creates no tax bill. Gains are reported on Schedule 3 of your return, due by the tax filing deadline of 30 April the following year.

How to calculate a capital gain step by step

Example: you buy 100 shares at $50, paying $10 in commission, for an ACB of $5,010. Years later you sell them at $80, paying another $10. Proceeds of $8,000 minus $5,010 minus $10 gives a gain of $2,980. Half, $1,490, is taxable. At a combined marginal rate of 29.65%, the tax is about $442. Keeping trade confirmations with your records, for example as receipts in EMOH Pay, makes the ACB easy to rebuild later.

1. Work out the proceeds of disposition: the sale price.
2. Work out the adjusted cost base (ACB): what you paid, including commissions and other acquisition costs. For shares bought at different times, the ACB is the average cost per share.
3. Subtract selling costs, such as commissions or legal fees.
4. Proceeds minus ACB minus selling costs is your capital gain, or loss if negative.
5. Multiply the gain by 50% to find the taxable capital gain, and add it to your income.

How capital losses reduce your tax

A capital loss is also 50% included, and allowable capital losses can only offset taxable capital gains, not salary. If you have more losses than gains in a year, you can carry the net loss back three years to recover tax already paid, or forward indefinitely to use against future gains.

• Superficial loss rule. If you or someone affiliated with you, such as a spouse, buys the same or identical property within 30 days before or after selling at a loss, the loss is denied and added to the new cost base.
• Tax-loss selling. Selling losing investments before year-end to offset gains is common. Allow for settlement time in late December.
• Losses in registered accounts. A loss inside a TFSA or RRSP cannot be claimed.

Planning for capital gains tax

Because gains are taxed in the year you sell, timing matters. Selling in a year when your income is lower, such as during a sabbatical or early retirement, can mean a lower marginal rate on the taxable half. Spreading large sales over two tax years can have a similar effect.

Keep records of every purchase, reinvested dividend and commission, since an accurate ACB is the easiest way to avoid overpaying. EMOH Pay's net worth tracking shows how your investments fit into your overall finances, and savings goals help you set aside money for a tax bill after a large sale. For growth projections, try the compound interest calculator.