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Capital Gains and Taxes: What You Need to Know in 2023

capital gains tax Canada

Learn more about this tax and how it relates to and affects your investments and tax return.

The difference between the purchase and selling values of capital properties, as determined by the Canada Revenue Agency, is essentially what is meant by the terms “capital gains” and “capital losses.” You’ve made a capital gain if the sale price was higher. A capital loss occurs when it is lower.

Simply put, a capital gain is any rise in the value of an investment you make that you made with your money. A capital gain would be recognized, for instance, if equities were purchased for $50 per share and later sold for $52 per share.

When you sell different kinds of capital assets, you may make capital gains. Typical examples include:

  • Bonds and stocks
    Mutual fund trust units
    Land Structures
    Business equipment
    Homes and other real estate

Capital gains are generally a good thing because they indicate that your investment has performed well and that you are receiving profitable returns on your money. However, this also has a negative side known as capital losses.

As you might have guessed, a capital loss occurs when your investment loses value over time. This indicates that your asset has lost value since you first invested in it and is thus a loss. Naturally, you’d prefer to stay away from these as much as you can, but losses do occasionally occur while investing.

Only capital gains are regarded as taxable, so they need to be your top concern. However, this doesn’t mean you should disregard capital losses because we’ll discuss how to use them to reduce taxable capital gains in a later section.

How Capital Gains are Taxed in Canada

The Canada Revenue Agency (CRA) levies tax on 50% of the capital gain amount when Canadian investors sell capital property for more than they paid for it. As a result, if you made $5,000 in capital gains, you must add $2,500 of those earnings to your total taxable income.

Your income level and the nature of your earnings will determine how much tax you must pay on your capital gains. You would have to pay more tax if you earn more money from various assets.

The CRA establishes a crucial distinction between capital gains that have been “realized” and those that have not. Any investment’s capital gains are regarded as unrealized and won’t be subject to taxation until they are sold.

This implies that your capital gains won’t be realized until you sell your investment, at which point they will be taxed. Therefore, while your investment is still increasing, you won’t need to worry about reporting for capital gains!

Capital Gains and Your Principal Residence

Your home is your biggest asset if you’re like the majority of Canadians. You want to obtain a solid return on your investment when it’s time to sell. Unlike stocks and bonds, profits gained from selling your primary property, or family home, are typically tax-free.

Any profit you make from selling your primary property won’t be counted as capital gains, but you’ll still need to record the transaction during the year it was made. However, there are several circumstances that will result in capital gains, such as if you either haven’t lived in your house as your primary residence for the whole time you’ve owned it or you’ve used a portion of it to generate money (business or rental)

Capital gains from the period when your house wasn’t your principal residence may also be due, and you’ll need to figure them out using form T2091.

You might also be responsible for capital gains from an area of your property that was rented out if you’ve rented out a portion of it, such as the basement or an additional suite or if you have used it as an Airbnb type rental for some of the year. If you are unsure if this applies to you, consulting with a tax professional is the best way to help you figure it out.

Capital Gains and Day Trading

The act of purchasing and selling stocks repeatedly in a single day is known as day trading. This enables you to profit from the small price changes that frequently occur on the stock market.

Day trading is a common source of income for many Canadians, and even though you are earning capital gains from stock investments, it is still seen as a full-time work. Because of this, if the CRA views you as a day trader, your trade proceeds will be taxed as income rather than capital gains, saving you a ton of money over time.

But keep in mind that the CRA thoroughly examines your earnings and decides for itself whether you qualify as a day trader or a less serious investor. Keep track of your trades so that you can present the required documentation when the time comes.

Common Capital Gains Exemptions

You might qualify for a capital gains exemption if you were a resident of Canada for the entire year and had to sell one or more qualifying properties for any reason.

Three different types of property are recognized as being eligible for this exemption:

  • Any private company shares in a corporation that conducts active business and is held by Canadians qualify as Qualified Small Business Corporation Shares. To qualify, you must have owned these shares for at least two years, either personally or through a family member. Also take note that this does not apply to mutual funds or publicly traded firms.
  • Property utilized in a farming enterprise, such as buildings, land, and milk and egg quotas, is referred to as qualified farm property. This group also includes any shares of a firm that runs a farm.
  • Real estate used for fishing, fishing boats, and fishing licenses are all considered qualified fishing property. Once more, if your fishing business is run through a corporation, those shares also count.

You may also have capital gains in reserve, which implies that rather than earning them all at once, you do so over a number of years. The sums you have not yet received are likewise excluded.

But outside of these categories, no other assets can be exempt from paying capital gains tax. To minimize the amount you’ll owe, it is especially crucial to balance your capital gains and losses.

Using Capital Losses to Offset Capital Gains

Capital losses signify that, instead of making a profit from your assets, you actually lost money. You can deduct losses on stocks, bonds, and other investments made during the year in order to pay less tax on your profits.

Depending on the circumstance, capital losses may be offset against capital gains for the current year, up to three prior years, or for future years. Additionally, you can entirely offset your capital gains by using all of your capital losses.

This implies that you can deduct your capital losses in years when you have capital gains if you had a terrible investment year after a brilliant one or vice versa. This lowers the amount of tax you would owe on your capital gains income, leaving more money in your pocket overall.

Capital gains can be a difficult concept to navigate at tax time, but getting it right is a must. Ignorance is no defense as far as the CRA is concerned! Consulting with a tax pro is a great way to ensure you are calculating and reporting capital gains and capital losses the right way while also maximizing the money you get to keep. Contact us today to learn more about how we can help you.