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Capital Gains Tax Canada: How It Works

Capital gains tax in Canada is about to change in 2024, with a proposed increase in inclusion rates for individuals and corporations alike. But before we dig deeper into this change and its implications, it’s essential to understand how the current capital gains tax system works. More importantly, it will help   investors learn the dynamics of capital gains and navigate the Canadian investment landscape with clarity and confidence. 

Amur Capital offers a simple way to grow your money and receive a stable and consistent return. Contact us now, and we’ll help you start in a few minutes. 

Key Takeaways: 

  1. Capital gains tax is the tax individuals pay in Canada when an asset or investment is sold at more than the cost of acquiring it. 
  2. Principal residence exemption, lifetime capital gains exemption, and using tax-sheltered accounts like TFSAs and RRSPs are some strategies to reduce or eliminate capital gains taxes. 
  3. Amur Capital shareholders do not earn capital gains; instead they receive income in the form of dividends which are taxed as interest income in the hands of the shareholder.

What Are Capital Gains?

Capital is any financial asset or investment, such as stocks, bonds, and real estate, that is used to generate income. Depending on its current value and original acquisition cost, you may earn or lose money from selling the asset. 

Simply put, capital gains refer to the profits made when an investment is sold for more than the cost of acquiring it. Some examples of capital properties that can incur capital gains when you sell them include: 

  • Securities (stocks, bonds, mutual funds) 
  • Land, buildings used in a business 
  • Cottages and antiques 

Specifically, a capital gain occurs when selling an asset for more than its adjusted cost base (ACB). The ACB is the asset’s cost plus any expenses needed to acquire it, such as management and legal fees. 

For example, say you purchased a stock for $1,000 and later sold it for $2,500. The profit you earned ($1,500) is the capital gain, almost twice its ACB ($1,000). 

Capital Gains vs Capital Losses 

Capital gains and losses are two sides of the same coin. Whereas capital gains refer to the surplus from selling an investment for more than its ACB, capital loss occurs when the asset is sold for less than its ACB. 

Going back to the example above, a stock purchased for $1,000 and sold lower for $500 will incur a capital loss of $500. 

Capital losses can be used to offset capital gains, reducing the income tax you have to pay. Moreover, Canada Revenue Agency (CRA) taxes only realized capital gains, which means the asset has been sold. So, even if your investment’s value has increased, but the asset hasn’t been sold, you don’t have to pay tax on the capital gains. 

How Are Capital Gains Taxed in Canada?  

Capital gains tax refers to the tax individuals pay for selling an investment or capital property. In Canada, only half of the capital gains are taxed at the individual’s marginal tax rate. The rationale behind the 50% inclusion rate for capital gains is to provide preferential tax treatment compared to regular income, which is fully taxable at the individual’s marginal rate. 

For example, if you sold an asset for $2,500 with an ACB of $1,000, the taxable capital gain is $750 ($1,500 gain x 50% capital gains tax rate). The $750 will be added to your taxable income, and you’ll be taxed at your marginal tax rate based on your tax bracket. For someone with a 20% marginal tax rate, the resulting taxable income would be $150 ($750 taxable capital gains x 20%).  

How to calculate tax on capital gains  

There are three things to consider when computing your capital gains taxes in Canada: proceeds of disposition, adjusted cost base (ACB), and expenses incurred to sell your property. 

A capital gain or loss can be calculated by this formula: 

Capital gain/loss = Proceeds of disposition – (Adjusted cost base + Outlays and expenses) 

Proceeds of disposition 

Proceeds of disposition are the amount earned or will be earned from selling an asset or capital property. It is usually based on the sale price of the property. In addition, proceeds of disposition may include the compensation received for a property that has been destroyed, expropriated, or stolen. 

Adjusted cost base (ACB)

Adjusted cost base (ACB) is the actual or deemed cost of acquiring a property or asset, including any capital expenditures such as renovations or improvements. However, current expenses like maintenance and repair costs are excluded. 

Outlays and expenses

Outlays and expenses are types of expenses that are incurred when selling a capital property or asset. These include finders’ fees, commissions, brokers’ fees, legal fees, transfer taxes, and advertising costs. 

Capital Gains vs Other Investment Income 

Investment incomes come in different forms, with their own tax rules. Here is how capital gains differ from other investment income, such as interest and dividend income: 

  • Capital gains: Only 50% of the total realized capital gains are taxable in Canada. It is added to the taxable income and taxed at the individual’s marginal tax rate. 
  • Interest income: 100% of the interest income from bank accounts, guaranteed investment certificates (GICs), and bonds are taxed at the individual’s marginal income tax rate. 
  • Dividend income: Dividends are taxable income, which means they are subject to tax in the year they are received. In addition, dividends received by a Canadian resident from a Canadian business get a dividend tax credit. 

It is important to note that when held in a registered account, such as a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), the capital gains, interest income, and dividends received in these accounts are tax-free. 

Exemptions On Capital Gains Tax 

Sale of principal residence 

The most common exemption to paying capital gains tax in Canada is the sale of a principal residence. According to the CRA, a principal residence is a designated housing unit that meets the following criteria: 

  • It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a cooperative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation. 
  • You own the property alone or jointly with another person. 
  • You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year. 
  • You designate the property as your principal residence. 

In addition, you can only designate one home as your family’s primary residence each year. 

Lifetime Capital Gains Exemption (LCGE) 

With the LCGE, otherwise known as the capital gains deduction limit, a cumulative amount exempts CRA-qualified farm or fishing properties (QFFP) and qualified business corporation shares (QSBCS) from capital gains taxes. Since it is cumulative, any qualified sale from either QFFP or QSBCS will count toward the limit. 

The total capital gains deductions on gains from disposing of QFFP is $1,000,000. On the other hand, the limit for QSBCS is $971,190. Note that these are for the total capital gains and not the 50% capital gains taxable. 

Gifted Property 

Transfers of capital property to your spouse or common-law partner will not incur any capital gain or loss because the recipient is considered to have bought the property for the same amount as its cost. However, the recipient will be liable to pay capital gains tax upon selling the property. 

Charity Donations

Some capital property donated to a registered charity or other qualified people may not incur capital gains tax, provided they meet certain conditions. This includes a share of capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust, and a share on a designated stock exchange, among others. 

Aside from the exemptions, there are also ways to reduce your capital gains tax: 

  • Use tax-sheltered accounts: When held in registered investment vehicles like TFSAs and RRSPs, any investment growth (interest, dividends, or capital gains) within these accounts is tax-free or tax-deferred. 
  • Tax-loss harvesting: In Canada, you can use a capital loss to offset your capital gains, reducing your payable taxes and minimizing the negative impact of losses on your portfolio. Capital losses can be used in the current year, the three preceding years, or in any future year as long as you make the necessary reporting of a capital gain or loss. 

2024 Federal Budget Update On Capital Gains Tax 

On April 16, 2024, the government presented their 2024 Federal Budget plan. Some of the notable tax changes directly affect capital gains: 

  1. Increase in the inclusion rate for capital gains on corporations and trusts as well as capital gains beyond $250,000 for individuals from 50% to 66.67%, effective June 25, 2024; 
  2. Raise the lifetime capital gains exemption for dispositions of qualified small business corporation shares to $1.25 million and a new 33.3% inclusion rate for up to $2 million of certain capital gains realized by entrepreneurs and 
  3. Create a new Canadian Entrepreneurs’ Incentive, which will reduce the inclusion rate to 25% on the first $250,000 of eligible capital gains and 33.3% for eligible capital gains beyond $250,000 on a lifetime maximum of $2 million in eligible capital gains in certain circumstances, to commence January 1, 2025, and phased in over ten years in increments of $200,000. 

Mortgage Investment Corporations (MICs) And Taxes

Mortgage Investment Corporations (MICs) are mortgage-backed investments that deliver steady income unrelated to publicly traded markets, helping investors boost their portfolio returns while reducing volatility. 

As “flow-through” entities, MICs get tax breaks regarding capital gains and cash inflows remaining untaxable under the Income Tax Act, avoiding double taxation for investors. Plus, when held in registered accounts such as the TFSA, RRSP, or RESP, all investment growth and withdrawals remain tax-free, depending on the account. 

Amur Capital: A Trusted Partner For MICs

Amur Capital’s MICs have enabled Canadian investors to earn stable returns with mortgage investing. Each of the mortgage funds minimizes risk by investing in mortgages with varying loan-to-value (LTV), mortgage sizes, and maturity compositions across thriving real estate locations in Alberta, British Columbia, and Ontario. 

In addition, all three of our funds suit a variety of risk tolerances and investment objectives, from capital preservation (Amur Capital Conservative Income Fund, Amur Capital Income Fund) to high yield growth (Amur Capital High Yield Fund). 

Amur Capital’s MICs are eligible for registered and non-registered accounts. With a registered account such as a TFSA or RRSP, you can maximize tax-free growth on your investment.

Contact our Investor Relations to get started today. 

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FAQs

A capital gain happens when you sell an asset or investment for more than the acquisition cost. An example of capital gain is selling a stock with an initial cost plus fees of $300 for $500. In this case, your capital gain is $200. 

That depends on your personal marginal tax rate and where you are in Canada. The current capital gains tax rate is 50%. So, a capital gain of $100,000 will result in a taxable capital gain of $50,000. This amount will be added to your annual income and be taxed at your marginal tax rate based on your tax bracket. 

Principal residence exemption, lifetime capital gains exemption, and charity donation are ways to avoid paying capital gains tax in Canada. 

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