Understanding Capital Gains Tax in Canada is crucial for individuals and businesses engaged in buying, selling, or investing in assets. With the latest changes to tax rates and inclusion rules effective from June 25, 2024, it’s important to know how capital gains tax is calculated and applied, especially if you’re managing significant investments. In this article, we’ll cover the key aspects of capital gains tax in Canada, from definitions and rates to how you can minimize or avoid the tax burden.
What is Capital Gains Tax?
Capital gains tax is the tax imposed on the profit you earn from selling a capital asset, such as stocks, real estate, or other investments. A capital gain is realized when you sell an asset for more than what you originally paid for it. However, in Canada, only a percentage of that gain—known as the inclusion rate—is subject to taxation.
Important Change as of June 25, 2024
As of June 25, 2024, the capital gains inclusion rate has changed. The inclusion rate for individuals is now either 50% or 66.67%, depending on the size of the capital gain:
- For gains under $250,000, 50% of the gain is taxable.
- For gains exceeding $250,000, 66.67% of the amount over $250,000 is taxable.
For corporations and trusts, the inclusion rate on all capital gains is now 66.67%.
This change marks a significant adjustment for investors and property owners, especially those with large gains.
What is the Capital Gains Tax Rate in Canada?
The capital gains tax rate in Canada depends on your personal income tax bracket, combined with the newly adjusted inclusion rates. Only the taxable portion (either 50% or 66.67%) of your capital gain is added to your income for the year and taxed at the corresponding rate.
Here’s how the tax works for individuals:
| Income Bracket | Federal Tax Rate | Provincial Tax Rate (Ontario) | Total Tax Rate for 50% Inclusion | Total Tax Rate for 66.67% Inclusion |
|---|---|---|---|---|
| $53,359 or less | 15% | 5.05% | 10.025% | 13.367% |
| $53,360 – $106,717 | 20.5% | 9.15% | 14.825% | 19.767% |
| $106,718 – $165,430 | 26% | 11.16% | 18.58% | 24.427% |
| $165,431 – $235,675 | 29% | 12.16% | 20.58% | 27.227% |
| Over $235,675 | 33% | 13.16% | 23.08% | 30.837% |
Key Points on Capital Gains Tax Rates:
- No one pays more than 27% capital gains tax on gains under $250,000.
- The inclusion rate for gains over $250,000 is 66.67%, meaning you pay a higher effective tax rate on larger capital gains.
- Corporations and trusts are taxed at the higher inclusion rate (66.67%) for all capital gains, regardless of the size.
What is Capital Gains Tax in Ontario?
For Ontario residents, capital gains tax follows the federal inclusion rules and is subject to both federal and provincial income tax rates. Ontario’s provincial rates for capital gains align with the inclusion percentages set by the federal government.
For example, if you have a capital gain of $300,000 in Ontario, the first $250,000 would be subject to the 50% inclusion rate, while the remaining $50,000 would be subject to the 66.67% rate. You would calculate the tax owed based on your marginal income tax bracket, which includes both federal and Ontario tax rates.
How to Calculate a Capital Gain
Calculating capital gains in Canada is relatively straightforward. The formula is as follows:
Capital Gain Formula:
Capital Gain = Selling Price – Adjusted Cost Base (ACB) – Costs of Sale
- Adjusted Cost Base (ACB): This is the original purchase price of the asset, plus any costs associated with acquiring it (legal fees, renovations, etc.).
- Selling Price: The price you received for selling the asset.
- Costs of Sale: These are costs associated with selling the asset, such as real estate commissions or legal fees.
Example Calculation:
Let’s say you bought a property for $200,000 and spent $20,000 on renovations. You sell the property for $500,000 and incur $15,000 in selling costs (real estate commissions, legal fees, etc.). Your capital gain would be calculated as follows:
| Item | Amount |
|---|---|
| Selling Price | $500,000 |
| Adjusted Cost Base (ACB) | $220,000 |
| Costs of Sale (commissions, fees) | $15,000 |
| Capital Gain | $265,000 |
In this case, your capital gain is $265,000. The taxable amount would be split according to the inclusion rates:
- $250,000 at 50% = $125,000 taxable.
- $15,000 at 66.67% = $10,000 taxable.
Thus, $135,000 would be added to your income for tax purposes.
When Do You Pay Capital Gains Tax in Canada?
You are required to pay capital gains tax in Canada when you file your annual income tax return. The taxable portion of your capital gain is added to your income, and the tax owed is calculated based on your overall income for the year.
- Reporting Capital Gains: You must report any capital gains in the year you sell the asset. For example, if you sold an asset in 2024, you would report the gain on your 2024 tax return, which is due by April 30, 2025.
- Installment Payments: If you owe more than $3,000 in taxes, including capital gains tax, the Canada Revenue Agency (CRA) may require you to pay quarterly tax installments.
How Do You Avoid Capital Gains Tax?
While it’s difficult to completely avoid capital gains tax, there are strategies to minimize it legally:
- Principal Residence Exemption: If you sell your primary residence, the capital gains on the sale are typically exempt from tax.
- Use of Capital Losses: Capital losses from other investments can be used to offset capital gains in the same year or carried forward to future years.
- Tax-Free Savings Accounts (TFSAs): Investments held in a TFSA are not subject to capital gains tax, allowing you to grow your wealth tax-free.
- Timing Your Sales: You can time your sales to a year when your income is lower, potentially reducing your overall tax liability.
Frequently Asked Questions (FAQs)
1. How do the 2024 changes affect capital gains tax for individuals?
The new rules as of June 25, 2024, introduce a two-tier inclusion rate for individuals. The first $250,000 of any capital gain is taxed at a 50% inclusion rate, while gains above $250,000 are taxed at a higher 66.67% rate.
2. Are corporations and trusts affected differently by the 2024 changes?
Yes, corporations and trusts now face a higher inclusion rate of 66.67% on all capital gains, regardless of the size of the gain.
3. Can I defer capital gains tax?
In some cases, you can defer capital gains tax by rolling over the proceeds from the sale of certain assets into similar investments, such as small business shares or farm properties.
4. What if I don’t report a capital gain?
Failure to report capital gains can result in significant penalties from the CRA, including interest on the unpaid tax amount and penalties up to 50% of the tax owed. Read more here
