The Capital Gains Tax in Canada is an important part of your tax return. The Canada Revenue Agency charges a capital gains tax on all Assets and Investments that you would sell as a profit. Many people come across this tax when they have sold a rental property, stocks, and many other investments. Our article below will show you what Capital Gains Tax is, how much the tax is worth, as well as all the different ways you can save on your tax return.
What are Capital Gains Tax Canada?
A capital gain is a profit of an investment that you have sold. For example, if you sold an investment property and you have a net profit, the capital gains tax will be taxed on the profitable amount. Capital Gains can be charged on the sale of any of these items below:
- Rental (Investment) property
- Stocks, Mutual Funds, Bonds, Trust
- Land, buildings, Equipment used for a business
The Capital Gains tax is only charged on 50% of the gain. For example: If you sold a home for $200,000 and the original purchase amount was $150,000. Then you would only be taxed on 50% of the profitable amount of $50,000. So the Capital Gains tax would only be taxed on $25,000 which is half of the profit.
What is a Capital Loss?
Essentially if you sell your investment property, or stock and you have a loss for the transaction then this would be considered as a capital loss. Capital Losses are not subject to tax. So no Capital Gains Tax Canada would be applied to your transaction. These losses are ideal when there is a time you may also have a capital gain. See below on the next section how you can take advantage of this further.
How do I determine what is a Capital Gain?
If you sell any of the items above and you have made a profit, then that would be a Capital Gain. One of the biggest strategies against owing on Capital Gains is to also sell an investment that would have a Capital Loss. So for example this situation happens a lot when selling Stocks or Bonds. Say you have sold a stock of Coca Cola and you have a profit (Capital Gain). But you have had another stock that you know will never recover and if you sold it, it would be a loss. So your Gain for example on Coca Cola is $100, and your loss of the other stock is a $100 - as a result you would not owe any Capital Gains Tax as they of course offset each other. Note: Whenever selling a Stock or Bond, try to offset it with another sale if you would have a loss in that investment. This can help you save more money on your taxes. See a Broker for more information.
Note: Whenever selling a Stock or Bond, try to offset it with another sale if you would have a loss in that investment. This can help you save more money on your taxes. See a Broker for more information.
There are many other ways of course to reduce your tax bill for the Capital Gains Tax Canada.
- Defer the capital gain if you will not receive the money from the sale right away
- Donate the assets to a registered charity or private foundation
- If you own a small business you can take advantage of the Lifetime Capital Gains Exemption
- Always choose the right time to sell your investments
Lets discuss each one of these in further detail
Deferring Capital Gains when you have not received the money
Deferring Capital Gains can only be done when you have not yet received the funds for the sale. For example, you sell your investment property but do not receive the funds until January 2021 of the next year. In this scenario that means you would not pay tax in 2020. You would defer your tax bill to 2021. This is considered Cash Basis accounting where you only are charged tax once you receive the money. For more help on Capital Gains Tax, contact Accufile and we can help you with your tax return today!
Donate the Asset to a Registered Charity or Foundation
If you make charitable donations regularly, you can use your gain as a donation or gift to reduce your Capital Gains Tax Canada. For example, if you are looking to cash out a Stock, you may instead donate the Stock to the charity to help offset your gains and or reduce your Capital Gains. Just make sure that it is a registered charity and that they will provide you with an official tax receipt.
Take advantage of the Life Time Capital Gains Exemption
If you operate a fishing activity, farm, and or a small business that is primarily in Canada, you may be eligible for the Life Time Capital Gains Tax. The exemption amount for 2019 was $866,912. This means that you could use up to this amount of your capital gain to not pay tax. 2020 will of course be a different amount and as of this article the amount has not been set yet by the Canada Revenue Agency. There are many restrictions and items for eligibility to qualify for this exemption, so make sure to speak to us at Accufile and or contacting the CRA in order to see if you qualify.
Always choose the right time to sell your investments
As discussed above, choosing the right time to sell your investments to offset future gains is a powerful tax tool that you can use. Choosing to postpone a sale just after the new year, could help you sell at a loss on another investment that you could use to offset. Just remember Capital Losses go against Capital Gains. This means you can also mix and match assets as well. A loss in the stock market can go against a gain in your investment property or vice versa. In addition, your loss can also carry forward as well to future years that you may have a gain.
I just sold my principal residence, is that subject to Capital Gains Tax Canada?
If you have sold a residence that is not an investment property then no you would not be subject to Capital Gains Tax. Selling your home that you officially live in is never an investment that could be a gain or loss. However there are new rules with the Canada Revenue Agency where you need to report the sale of your principal residence. This reporting is only a notification and not subject to tax in Canada.
What qualifies as a principal residence?
A principal residence is your primary residence where you live. This cannot be an investment property or an address you visit from time to time. It has to be your sole living in property in order to qualify as a principal residence. This residence can be a house, apartment, trailer, or a boat.
What if one of my investments have a dividend payout?
Investing in a stock that pays out dividends are taxed but not under the same tax rate as a Capital Gain Tax. Capital Gains are only paid on an investment that is sold. When your dividend is paid out to you, this is added to your income tax return as dividend income. Dividend income is taxed lower than Capital Gains Tax Canada.
What if I am living abroad and not living in Canada?
If you are living outside of Canada, you can be subject to Capital Gains Tax depending on your residency status. If you are still deemed a Canadian resident even though you live abroad, you will still be subject to the Capital Gains Tax. In order to determine if you are a resident still or not please see this link to the Canada Revenue Agency to verify your residency status.
What if I am transferring an Asset to my spouse or dependent?
You may also be exempt if you are transferring your Asset to your spouse or dependent. Remember that you are only subject to Capital Gains Tax when you sell your property or investment. A transfer would just be transferring into their name. However if you are transferring a business, farm or fishing property to another Corporation then you can be subject to Capital Gains Tax Canada. For any questions regarding transferring of assets please contact Accufile as we offer free consulting services all year round when you are a client of ours.
Accufile is here to help!
Yes we know that there are some tax situations that can be very confusing at times. That is why Accufile is here to help. When you file with Accufile, you will receive free consulting for business and personal all year round. File with us today and take advantage of our $25 Personal Returns, $75 Business Returns, and $200 Corporate Returns.