Calculate your capital gains taxes and average capital gains tax rate for the 2020 tax year.
You receive or realize a capital gain when you sell an asset for more than its adjusted cost base (ACB), which is the total amount of expenses spent on acquiring it. If you sell the property for less than the ACB, you will have a capital loss. In Canada, you have to treat 50% of your capital gains as income on your tax return.
WOWA.ca calculates your capital gains tax by adding your capital gains to your income and calculating how much tax you have to pay on that additional amount. Your average capital gains tax rate is calculated by dividing your capital gains tax by your total capital gains.
The inclusion rate determines the percentage of capital gains that will be taxed; in Canada, it is 0.5 or 50%. Your taxable capital gains are equal to your total capital gain multiplied by the inclusion rate. 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 will not be taxed as capital gains.
Real estate property includes 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 the capital gains tax form. If you sold both the property along with the land it sits on, you must determine how the sale price is distributed amongst the land and the building and report them separately on the capital gains tax form.
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 still only be one principal residence for both of you. The exemption only applies for Canadian residents. You will still have to report the sale of the property on the capital gains tax form, but the tax will be deducted if 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.
If during your time of ownership 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. A portion of the gain on the sale will be subject to the capital gains tax and the calculation will be based on the number of years during which the property was deemed your principal residence.
If only part of your home is considered to be the principal residence as some parts are used to produce income, then you will have to distribute the ACB and the sale price between the parts that are used for principal residence and parts that are not when reporting the sale to determine what portion of the capital gain is taxable.
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. But 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. You can ask for an exemption to this rule if you can prove that the extra land is solely for your enjoyment and not for any business.
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. 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).
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 if you purchased shares of family farm corporations, fishing corporations, or qualified small business corporations.
Dividends do not count as capital gains. They are taxed using a separate system that first calculates the amount of taxable dividend by determining how much the paid dividend would be without corporate income tax using the gross-up rate, and then multiplying the full taxable amount by the dividend tax rate. Some amount of the tax can be reduced with federal and provincial dividend tax credits.
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.
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 and will be required to fill out a separate form on gifts of capital property to receive exemption.
You may also be exempt from paying the capital gains tax if you are transferring assets to your spouse or their trust as the value of the asset is considered to remain the same.
You may earn capital gains when transferring farm or fishing property or transferring assets to Canadian corporations or partnerships, in which case you may postpone reporting the gain.
If you have assets that are 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, there are certain situations in which this does not apply.
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:
Aside from TFSAs, you may be taxed on your withdrawals from these accounts although they will not be taxed as capital gains—they will be treated and taxed as regular income.
Any interest earned from investment in non-registered accounts will be taxed as regular income and not capital gains. To differentiate interest from capital gains, it is helpful to consider interests to be compensations that make up for the decrease in invested funds due to time depreciation; for example, investors of bonds and GICs receive interest income from the borrowing company.