Are you a hustler who wants to make money from your investments, but don’t know how much tax you’ll have to pay on your profits? If so, you’re not alone. Many Canadians are confused about how capital gain tax works in Canada, and what strategies they can use to minimize their tax bill.
In this article, we’ll explain everything you need to know about capital gain tax in Canada, including:
- What is a capital gain and how is it calculated
- What is the capital gains tax rate and how does it vary by income level
- What are the exceptions and exemptions for capital gain tax
- What are the best ways to reduce your capital gain tax liability
By the end of this article, you’ll have a clear understanding of how capital gain tax works in Canada, and how you can optimize your investments to keep more of your hard-earned money.
KEY TAKEAWAY
| Term | Definition |
| Capital Gain | The difference between the selling price and the purchase price of an asset or investment |
| Capital Gain Tax | The tax levied on 50% of the capital gain amount |
| Capital Gain Tax Rate | The marginal tax rate that applies to your taxable income, including 50% of your capital gain |
| Capital Loss | The difference between the selling price and the purchase price of an asset or investment when it is negative |
| Capital Loss Deduction | The amount of capital loss that can be used to offset your capital gain in the same year or carried forward or back to other years |
| Principal Residence Exemption | The exemption that allows you to avoid paying capital gain tax on the sale of your primary home |
| Lifetime Capital Gains Exemption | The exemption that allows you to avoid paying capital gain tax on the sale of qualified small business corporation shares or qualified farm or fishing property up to a certain limit |
What is a Capital Gain and How is it Calculated?
A capital gain is the profit you make when you sell an asset or investment for more than what you paid for it. For example, if you buy a stock for $100 and sell it for $150, you have a capital gain of $50.
To calculate your capital gain, you need to subtract your adjusted cost base (ACB) from your proceeds of disposition (POD). Your ACB is the total amount you paid for the asset, including any fees, commissions, or taxes. Your POD is the total amount you received for the asset, minus any fees, commissions, or taxes.
For example, if you bought 100 shares of XYZ Corp. for $10 each, plus $5 in commission, your ACB would be $1,005 ($10 x 100 + $5). If you sold those shares for $15 each, minus $5 in commission, your POD would be $1,495 ($15 x 100 – $5). Your capital gain would be $490 ($1,495 – $1,005).
What is the Capital Gains Tax Rate and How Does it Vary by Income Level?
Capital gains tax is the tax you pay on 50% of your capital gain amount. This means that only half of your profit is added to your taxable income for the year. For example, if you have a capital gain of $1,000, only $500 will be taxed.
The capital gains tax rate depends on your marginal tax rate, which is the combined federal and provincial tax rate that applies to your highest income bracket. The higher your income, the higher your marginal tax rate, and the more tax you pay on your capital gain.
For example, if you live in Ontario and have a taxable income of $50,000 in 2023, your marginal tax rate would be 29.65%. This means that you would pay 29.65% x 50% = 14.83% in capital gains tax on any additional income. If you have a capital gain of $1,000, you would pay $148.30 in tax ($1,000 x 50% x 14.83%).
However, if you have a taxable income of $100,000 in 2023, your marginal tax rate would be 43.41%. This means that you would pay 43.41% x 50% = 21.71% in capital gains tax on any additional income. If you have a capital gain of $1,000, you would pay $217.10 in tax ($1,000 x 50% x 21.71%).
The table below shows the marginal tax rates and capital gains tax rates for different income levels in Ontario in 2023.
| Taxable Income | Marginal Tax Rate | Capital Gains Tax Rate |
| Up to $13,808 | 0% | 0% |
| $13,809 to $49,020 | 20.05% | 10.03% |
| $49,021 to $78,783 | 29.65% | 14.83% |
| $78,784 to $97,069 | 31.48% | 15.74% |
| $97,070 to $150,473 | 43.41% | 21.71% |
| $150,474 to $216,511 | 46.84% | 23.42% |
| Over $216,511 | 53.53% | 26.76% |
What are the Exceptions and Exemptions for Capital Gain Tax?
There are some situations where you don’t have to pay capital gain tax, or you can pay less than the normal rate. These include:
- Capital losses: If you sell an asset or investment for less than what you paid for it, you have a capital loss. You can use your capital loss to reduce your capital gain in the same year or carry it forward or back to other years. For example, if you have a capital gain of $1,000 and a capital loss of $500 in the same year, you can deduct the loss from the gain and only pay tax on $250 ($1,000 – $500 x 50%). If you have more capital losses than gains in a year, you can carry forward the excess loss to future years, or carry back the loss to the previous three years, and apply it against any capital gains you had in those years.
- Principal residence exemption: If you sell your primary home, you can avoid paying capital gain tax on the increase in value of your property. This is called the principal residence exemption. To qualify for this exemption, you must meet the following conditions:
- You own the property alone or jointly with another person
- You live in the property as your main residence
- You designate the property as your principal residence for each year you own it
- You don’t use the property to earn income (such as renting it out)
- You don’t claim any other property as your principal residence for the same year
- Lifetime capital gains exemption: If you sell qualified small business corporation shares or qualified farm or fishing property, you can avoid paying capital gain tax on a portion of your profit. This is called the lifetime capital gains exemption (LCGE). The LCGE limit for 2023 is $913,630 for small business shares and $1 million for farm or fishing property. To qualify for this exemption, you must meet certain criteria depending on the type of property you sell.
What are the Best Ways to Reduce Your Capital Gain Tax Liability?
Besides using the exceptions and exemptions mentioned above, there are some other strategies you can use to lower your capital gain tax bill. These include:
- Holding your investments in registered accounts: If you hold your investments in a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a tax-free savings account (TFSA), or a registered education savings plan (RESP), you don’t have to pay any tax on your capital gains until you withdraw money from these accounts (except for TFSA, where withdrawals are always tax-free). This allows your investments to grow tax-deferred or tax-free and reduces your taxable income in the year of withdrawal.
- Timing your sales: If you plan to sell an asset or investment that has appreciated in value, you can choose to sell it in a year when your income is lower, or when you have more capital losses to offset your gains. This way, you can pay less tax on your capital gain by taking advantage of lower marginal tax rates or capital loss deductions.
- Splitting your income: If you own an asset or investment jointly with another person, such as your spouse or partner, you can split the capital gain with them and report half of it on each of your tax returns. This way, you can reduce your taxable income and pay less tax on your share of the gain.
Conclusion
Capital gain tax is an important factor to consider when investing in Canada. By understanding how it works and how it varies by income level, you can make informed decisions about when and how to sell your assets or investments. By using the exceptions and exemptions available to you, and by applying some smart strategies to reduce your tax liability, you can keep more of your profits and grow your wealth faster.
We hope this article has helped you learn how capital gain tax works in Canada. If you have any questions or comments, please feel free to contact us at https://hustlehub.ca/
Source:(1) Capital Gains – 2022 – Canada.ca. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html. (2) Capital gains tax in Canada, explained – MoneySense. https://www.moneysense.ca/save/taxes/capital-gains-tax-explained/. (3) Capital Gains Tax In Canada: What To Know – Advisorsavvy. https://advisorsavvy.com/capital-gains-tax-canada/. (4) Capital Gains Tax in Canada (2023): The 50% Rule – Wealth Awesome. https://wealthawesome.com/capital-gains-tax-in-canada/.