Capital gains tax is important for Canadians who own investments, real estate or other valuable assets. It’s when you sell or “dispose of” an asset for more than you paid for it and you have a capital gain. While this sounds scary, a tax accountant Mississauga can help you understand how it works and help you minimize your tax bill.
What is a Capital Gain?
A capital gain is when the sale price of an asset is more than its adjusted cost base (ACB) and any selling costs. Common assets subject to capital gains tax:
- Stocks, bonds and mutual funds.
- Real estate properties, excluding your principal residence.
- Collectibles, such as art or jewelry.
If you sell an asset for less than you paid for it, you have a capital loss. Capital losses can be used to offset gains in the same year or carried forward to reduce gains in future years.
How is Capital Gains Tax Calculated?
In Canada, 50% of a capital gain is taxable. This taxable amount is added to your income for the year and taxed at your marginal tax rate.
Example:
- You buy shares for $10,000 and sell them for $15,000.
- Your capital gain is $15,000 – $10,000 = $5,000.
- The taxable amount is 50% of $5,000 = $2,500.
- If your marginal tax rate is 30%, you owe $2,500 x 30% = $750 in capital gains tax.
Exemptions and Special Cases
Some assets and transactions are exempt or get preferential treatment under Canadian tax laws. A tax accountant Edmonton can review your situation to see if you qualify for preferential tax treatment. Some of these scenarios are:
- Principal Residence Exemption: If you sell your primary home, you may be exempt from capital gains tax. But not for rental or secondary properties.
- Lifetime Capital Gains Exemption (LCGE): Canadian residents can claim an exemption on the sale of qualified small business corporation shares or qualified farm or fishing properties. For 2024, the LCGE limit is $971,190 for small businesses.
- Gifts and Inheritances: Giving an asset as a gift or inheriting one doesn’t trigger capital gains tax immediately but tax will apply when the asset is sold.
How to Minimize Capital Gains Tax
- Hold Investments Long-Term: Delay selling assets to defer capital gains tax and potentially lower rates when you’re in retirement.
- Tax-Advantaged Accounts: Invest in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) to shelter gains from tax. The gains in a TFSA are tax-free and the gains in an RRSP are deferred until withdrawal.
- Harvest Capital Losses: Offset gains by selling underperforming assets to realize capital losses. This is called tax-loss harvesting and reduces your taxable gains.
- Income Splitting: Transfer assets to a lower-income spouse (if allowed) to take advantage of their lower marginal tax rate.
How to Report Capital Gains
Capital gains or losses are reported on Schedule 3 of your tax return. If you’re not sure how to calculate your gains, consult a professional tax accountant.
Bottom Line
Capital gains tax is a consideration for Canadians selling assets or investing for the future. By understanding it, using exemptions and tax strategies, you can reduce your tax and keep more of your money. Plan ahead and seek professional tax accountant advice to ensure your decisions align with your long-term goals.
