Capital gains are a good thing, right? Especially when you sell investment assets for more than what you paid. I mean, who doesn’t want to make money on their investments?! The only problem is that the CRA wants a piece of the pie regarding capital gains and taxes. In this article, we’ll go over how capital gains are taxed in Canada so that you can be informed about what to expect when sitting down with your accountant (or TurboTax) to file your tax return.
What is capital gains tax?
Capital gains tax is a tax on the profit made from the sale of an asset. It is a percentage of your profit, so if you sell your house for $300,000 and make $100,000 in profit (thus giving you a capital gain), you will pay capital gains taxes on that amount. The tax rate depends on how long you owned the asset before selling it:
- If you sold an asset after owning it for less than one year, then your capital gains will be taxed at your regular income tax rate
- If you sell an asset after owning it for more than one year but less than two years, your capital gains will be taxed at 50% of your regular income tax rate.
- And finally, if you sell an asset after owning it for over two years, then all of its profits are considered “qualified” and can be taxed at 25%
How are capital gains taxed in Canada?
Capital gains are taxed as income.
If you’re wondering how capital gains are taxed in Canada, it’s pretty simple. Capital gains are considered taxable income, and your profits will be added to your regular income. You’ll have to pay taxes on that money at the same rate as any other income you earned during the year.
For example, if your total annual salary was $50k and then you had an investment property that sold for $1 million (a $950k profit), this would be considered a capital gain because:
- You owned an asset (the investment property).
- The asset was sold or “disposed of.”
- The sale price was greater than what it initially cost to buy the asset (mortgage).
Are there any exceptions to the rule?
There are two common exceptions to the rule. If you sell a capital property that you used for business or rental purposes, you may not be taxed on the gain. Instead, your losses will be offset against any net income from other sources before your taxes are calculated. The second exception is if you already had the item in question before February 1992 and sold it after May 1st of that year—in this case, only 50% of your gains will be taxable income.
Capital gains can be an excellent outcome, but be prepared for the taxation that comes with it.
The capital gains tax is a good thing! It helps the government collect revenue and a strong incentive to invest in the stock market, real estate, and your business. When you have profited from selling an asset that you’ve owned for more than one year (known as a long-term investment), you don’t pay any tax on them. However, when you sell an asset that you’ve held for less than one year (known as a short-term investment), there will be taxes due on those profits.
Conclusion
Capital gains can be a nice outcome but be prepared for the taxation that comes with it. Make sure to keep track of records of your assets and investments in order to calculate your capital gains accurately. You may want to contact a professional accountant in order to give you peace of mind that you are doing this correctly.
