The Capital Gains Tax was created in 1972 to replace in part the inheritance tax to finance the social security system.

Capital Gains tax 2018 image

For the Canada Revenue Agency you have a capital gain when you sell or are considered to have sold capital property (whether you sell or barter the property, you change all or part of the property use or give it as a gift). 

Real estate properties (other than primary residence), securities and land are capital property. As well as equipment you use in a business or rental operation (inventories are excluded). And yes, crypto currencies are subject to the capital gain tax.

There are some exemptions; selling your primary residence or donating securities to a registered charity or private foundation. The lifetime capital gain exemption can only be claimed by qualified small business shares and qualified farm or fishing properties. 

Other exemptions are the profits obtained from registered education and registered retirement savings plans.

There is a specific formula to help you calculate whether you have capital gain or capital loss.

How much should you pay?

If you had a capital gain, the tax will only apply to 50% of the gain (also known as inclusion rate). Then the rate of your tax bracket is applied. For instance, if you sell stock and you realize $10,000 in capital gains. Let’s assume your rate is 33%. The taxable capital gain is $5,000 and your tax owing will be $1,650.

Strategies to reducing capital gain tax impact

Some common tax planning techniques will help you reduce the capital gains tax impact. Remember when investing, use all the available tax exemptions listed before. We share some tax tips

  • Avoid capital gains tax on investments by using registered education and registered retirement savings plan
    • Please consider that if you include riskier investments in these plans and they are not profitable, you can’t use the losses to offset any other taxable capital gain.
  • When selling your principal residence; be aware that exemption is subject to certain conditions and limitations related to the change in use of your home, rental of a portion of your home (i.e. basement), the size of the property (not more than ½ hectare).
  • Cost Deductions: capital expenses can be used to increase your adjusted cost base thus reducing your capital gain. That’s why it’s important to keep records of the home improvements

Some additional strategies to save your money

  • Tax loss harvesting: you can reduce your taxable capital gain by selling unprofitable investments or capital property. Some people buy those investments back. However if you choose to do that, you need to be aware of the superficial loss rule.
  • Sell your profitable capital property when your income is low. The capital gain tax rate is based on your income.
  • Claim a reserve: If you sell capital property and a portion of the proceeds will be received beyond the year of sale, you can defer a portion of the capital gain by claiming a reserve for up to a maximum of 5 years (some conditions apply). You cannot claim a reserve if proceeds are received as a promissory note.
  • Timing: when planning to sell a profitable investment, you can delay the sale to the beginning of the next calendar year. And you are liable to pay the tax owed by April 30th of the following year.

What if your spouse has capital losses? How can you use the superficial loss rule to your advantage?

Consult your accounting tax professional for more tax planning strategies and savings.

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