Calculate your capital gains taxes and average capital gains tax rate for the 2020 tax year.
You realize a capital gain when you sell a capital asset and the proceeds of disposition exceeds the adjusted cost base. Capital assets subject to this tax, according to the Canada Revenue Agency, include buildings, land, shares, bonds, and trust units.
The proceeds of disposition is what you sold your capital property for, less any outlays and expenses of selling. The adjusted cost base is what you paid to acquire the capital property, including any costs related to purchasing the capital property.
The capital gains inclusion rate is 50% in Canada, which means that you have to include 50% of your capital gains as income on your tax return. WOWA calculates your average capital gains tax rate by dividing your capital gains tax by your total capital gains.
The adjusted cost base (ACB) is the cost of a capital property including any costs related to the acquisition of the capital property.
For financial instruments such as stocks, the adjusted cost base is calculated as the number of shares multiplied by the share price at the time the shares were bought. For instance, if 100 shares of XYZ Company were purchased at a price of $30 each, then the ACB would be $3,000. If more shares of the same corporation are purchased in the future, the adjusted cost base would be the total cost of all the shares purchased at their respective prices. The adjusted cost base per share would be the average purchase price for all the shares. For instance, if you purchased 50 more shares of XYZ Company at a price of $35, the ACB per share would be $31.67. The adjusted cost base also includes any costs incurred to acquire the stock, such as trading commissions.
For real estate properties, the adjusted cost base includes the purchase price of the property, closing costs, and capital expenditures on the property.
Closing costs are the fees that a buyer pays to acquire the real estate property and include one-time fees such as the land transfer taxes, lawyer and legal fees, home inspection fee, and property survey fee. It is important to differentiate between capital expenditures and current expenses on your property.
Current expenses cannot be included in the adjusted cost base while capital expenditures should be included in the ACB, irrespective of when the capital expenditures were made during the entire duration of your ownership of the home.
Some examples of capital additions and improvements to your home include installing a new HVAC system, waterproofing your basement, installing a hot tub, etc. Meanwhile, current expenses are monthly costs incurred by the homeowner or a tenant, such as electricity bills, hydro bills, restorations, and short term repairs such as painting the wall or replacing broken light bulbs.
The Canada Revenue Agency guidelines on current expenses and capitalexpenses indicate that capital expenditures are improvements that provide a long term benefit, significantly increase the value of the home, and contribute to extending the useful life of your property.
Proceeds of Disposition is what you have earned when you sell your capital property. Outlays and Expenses are the costs of selling and these may be deducted from the Proceeds of Disposition. For instance, if you sell financial instruments such as shares in a company, the trading fees you incur will be deducted from what you sold the shares for to get the Proceeds of Disposition on the stock. For real estate, Common Outlays and Expenses include costs of selling a house such as real estate commissions, lawyer fees and legal fees. If your proceeds of disposition is in a foreign currency, convert the foreign proceeds to Canadian dollars using the Bank of Canada daily exchange rate on the date you sold the capital property.
The capital gains inclusion rate of 50% determines how much of your total capital gains that will be subject to tax. Investments in registered plans such as a Registered Retirement Savings Plan (RRSP), Registered Retirement Plan (RPP), or Tax-Free Savings Account (TFSA) are considered tax-sheltered and capital gains tax will not be charged on investments while they are held in these accounts. The disadvantage with a registered investment account is that you will also not be able to carry forward any capital losses. For more information on registered and non registered investment accounts, see Capital Gains on Investment Accounts.
Real estate property includes residential properties, vacant land, rental property, farm property, and commercial land and buildings. If you have sold real estate property, you will have to report any capital gains or losses on Schedule 3, the capital gains and losses form. If you sold both the property along with the land it sits on, you must determine how the sale price is distributed between the land and the building and report them separately on the Tax Form Schedule 3. For example, you just sold a property for proceeds of disposition less outlays and expenses of $500,000. The Municipal Property Assessment Corporation (MPAC) appraised the land at $125,000, meaning that the land is worth 25% of the property value. Your adjusted cost base was $400,000, so your total capital gains is $100,000, and your taxable capital gains is 50% of that, or $50,000. The taxable capital gain for the land would be $12,500 and the taxable capital gain for the building would be $37,500.
When you sell real estate property, you may be exempt from paying capital gain tax if the property was your principal residence. You are only allowed to have one principal residence at a time, and if you have a spouse there can only be one principal residence for both of you. The principal residence exemption only applies for Canadian residents. You will still have to report the sale of the property on Schedule 3. The tax will then be deducted when you fill out Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), a separate form that designates the property as your past principal residence.
During your time of ownership, if there was a period where the property was not your principal residence, then you will not be able to receive the full amount of tax exemption. Instead, the exemption will be calculated based on the number of years that you held the property as your principal residence.
If part of your home was used as a principal residence and part of your home was used to generate income, you are required to distribute the ACB and the sale price between the two parts. For example, if 40% of your home was rented out to a tenant and 60% was designated as your principal residence, the principal residence exemption will only apply to 60% of the ACB and sale price.
If you held ownership of the property for 10 years, and it was rented out for 4 years, you would input 6 years into line 3 on Form T2091(IND) and complete the calculation in Part 1 to calculate your principal residence exemption.
Another instance would be if you held ownership of the property for 10 years, but during the entire 10 years your property was partially rented out. For example, you rented out a few bedrooms or the basement while you were living in the remaining bedrooms of the same property. If the portion you rented out does not exceed 50%, then you may claim the full benefit of the principal residence exemption.
Your principal residence is where you and your family normally live in Canada during the year. You must own or jointly own the home. However, in some cases, a vacation property that you own and only you and close relatives use may be considered as your principal residence as long as you don’t earn any rental income from it. You don’t even have to live in the residence for the whole year. However, you can only claim one home as a principal residence in any calendar year for your family unit (you, your partner and any children under 18 years of age).
Your principal residence can be any number of different property types according to the Canada Revenue Agency. It can be a house, a duplex, a condo, a cottage, a cabin, a mobile home, a trailer or a houseboat. You can generally only have half a hectare (1.25 acres) of land on which your residence sits. However, there are exceptions to this. For instance, if the municipality you bought your property in has a minimum lot size that is already greater than half a hectare, then you may prove the increased lot size is solely for enjoyment purposes.
When selling a property that is not a principal residence, including a second home or investment property, you will have to pay capital gains tax. There are a few ways to reduce your capital gains tax.
You may be able to designate your second home as your principal residence by making an election to change your principal residence. There is a 4-year limit on designating your second home as a principal residence; however, this may be extended indefinitely if you or your spouse can prove the second home is being used for work-related reasons, such as your employer asking you to relocate. You will then qualify for the principal residence tax exemption and won’t have to pay capital gains tax. If you rent out your second home, however, it cannot qualify as a principal residence. It’s more complicated if you’ve only rented it out for part of the time you’ve held it. You may be able to claim the property as your principal residence for the time when you were using it. If so, you will not have to pay capital gains tax on the appreciation during that time. The CRA considers the total appreciation to be evenly spread over the time you have held the property.
For example, let’s say you buy a property for $500,000 and you sell it for $1 million 10 years later. For five years of that time, you’ve used the property as a personal second home and principal residence. For the other five years, it was rented out. The total capital gains would be $500,000, but you could potentially pay capital gains tax on only $250,000 (or half of $500,000).
The capital gains exemptions include the principal residence exemption as mentioned above, the lifetime capital gains exemption, exemption on capital gains for donations, and capital gains on gifted property.
The lifetime capital gains exemption is also known as the capital gains deduction and is on line 25400 of your tax return. Canadian residents have a cumulative lifetime capital gains exemption (LCGE) when they dispose of eligible properties. The capital properties eligible for the LCGE include qualified small business corporation shares (QSBCS) and qualified farm or fishing property (QFFP). The lifetime limit refers to the total amount of LCGE you can claim throughout your lifetime. Last updated in 2019, the lifetime capital gains exemption for qualified small business corporation shares is $866,912 and the lifetime capital gains exemption for qualified farm or fishing property is $1,000,000. This means that in the years prior to 2019, if you have already claimed $866,912 in lifetime capital gains exemption for QSBCS, you cannot claim any further amounts.
If you donate certain assets to a registered charity or other qualified donees, you may be exempt from paying capital gains tax on any capital gains realized from these gifts. The types of assets that are eligible for the exemption when donated are:
Qualified donees in Canada include:
You will still have to report any capital gains and losses of these gifts on the capital gains tax form (Schedule 3) and will be required to fill out a separate form - T1170 Capital Gains on Gifts of Certain Capital Property to receive the exemption.
You may transfer capital property to your spouse if they are at a lower income tax bracket to save on capital gains tax as a family. Depending on the type of property, you will transfer them to your spouse at either the Adjusted Cost Base (ACB) or the Undepreciated Capital Cost (UCC). After the transfer, you will not incur capital gains tax but when your spouse sells the capital property, they will pay capital gains tax.
If the capital property you transferred to your spouse is eligible for the Lifetime Capital Gains Exemption, then your spouse can use their remaining LCGE limit when selling the capital property to reduce their capital gains tax. Eligible properties for the LCGE include qualified small business corporation shares (QSBCS) and qualified farm or fishing properties (QFFP).
The capital gains tax rate in Canada can be calculated by adding the income tax rate in each province with the federal income tax rate and then multiplying by the 50% capital gains inclusion rate. Your income tax rate bracket is determined by your net income, which is your gross income less any contributions to registered investment accounts. The capital gains tax rates for each province is listed below based on tax bracket:
If you have assets that sold for less than the total cost you spent on them, you can offset your capital gains with the capital losses to reduce the amount of capital gains tax you have to pay. If you have more capital losses than capital gains in any given tax year, you can carry the net capital loss to the capital gains of the last three years or forward to offset any capital gains in future years.
Capital losses cannot be claimed for personal-use properties as it is considered to be a personal expense. Personal-use properties include principal residences, automobiles, furniture, and all other household or personal items.
Tax-loss selling, wash-sales and tax-loss harvesting all define the act of deliberately selling an asset at a loss to offset capital gains. To counter this, Canada has a superficial loss rule in the Income Tax Act which if you or someone affiliated with you buys back an asset within 30 days of selling it, you are not allowed to claim capital loss for it. However, if you think that an investment will be unlikely to recover in value and you are unlikely to repurchase it in the future, selling a capital property that has decreased in value can set off a capital loss and help you reduce your capital gains tax. The superficial loss rule also states that if you are claiming the capital loss you cannot repurchase an equivalent asset. For example, if you sell a gold bar at a loss, you cannot repurchase another gold bar within 30 days of selling it. This is because the gold bars are equivalent commodities. However, if you sell one company’s stocks at a loss, you are allowed to purchase another company’s stock in the same sector if you think the sector has future potential to outperform.
If you have investments in a registered account, you do not have to pay capital gains tax on them even if they grow in value as they are deemed to have tax-deferred or tax-sheltered status by the government. Registered accounts in Canada include:
Tax-deferred accounts include the RRSP, RESP, RDSP, PRPP. When you first invest into tax-deferred accounts, you can reduce your taxable income by the amount you invest into the account. Funds in tax-deferred accounts are taxed when you withdraw from the account. The TFSA is a tax-sheltered account. When you contribute to your TFSA, your taxable income does not change, meaning that the amount you contribute cannot help you reduce your income tax. However, when you withdraw funds from the TFSA, you are not required to pay tax.
There are both advantages and disadvantages to holding capital property in registered accounts. The advantage is that you are not required to pay tax on capital gains for investments inside registered accounts. However, you will also not be able to use capital losses from investments in registered accounts to offset your capital gains tax.
If your realized capital gain was made from selling:
You will have to report the capital gain to be taxed. In some cases, your tax can be deferred or deducted from your Lifetime Capital Gains Exemption if you purchased qualified shares of family farm corporations, fishing corporations, or qualified small business corporations.
Dividends do not count as capital gains. The tax on dividends can be calculated as the paid dividend times gross-up rate multiplied by the individual’s effective tax rate, less any federal and provincial dividend tax credits. Dividend tax can be calculated by inputting your dividends into the Canada Income Tax Calculator.
If you live outside of Canada, your capital gains tax will depend on your residency status as well as your country of residence. If you are still a Canadian resident, you will be subject to Canadian capital gains tax unless otherwise exempted by the principal residence tax exemption. If you are not a Canadian resident, then your capital gains tax will depend on your local taxes as well as the existence of any tax treaty with Canada. These are general guidelines, and to find out more information about your specific tax situation and residency status you should consult a tax lawyer specializing in international tax accounting.
For more information relating to the capital gains tax, please contact Canada Revenue Agency at 1-800-959-8281.