Capital Gains Tax in Canada: A 2024 Guide

Understanding the Key Changes and How to Reduce Your Tax Burden

Capital gains tax is an important consideration for all Canadian investors and property owners, especially with the recent changes introduced in 2024. This comprehensive guide will explain what capital gains tax is, outline the key changes made in 2024, what assets are subject to tax, how capital gains tax applies to inherited assets, strategies to reduce your tax burden, and when capital gains tax must be paid.

What is Capital Gains Tax in Canada?

Capital gains tax in Canada is a tax applied to the profit that results when certain capital assets are sold for more than their original purchase price. It is not a separate tax, but rather, the taxable portion of the capital gain is added to your total income for the year and taxed at your marginal tax rate.

The taxable portion of a capital gain is determined by the capital gains inclusion rate. Prior to 2024, Canada used an inclusion rate of 50%, meaning only 50% of capital gains realized were subject to tax.

For example, if you purchased stocks for $10,000 and later sold them for $15,000, realizing a $5,000 capital gain, only $2,500 would be added to your taxable income and subject to your marginal tax rate.

Changes to Canada Capital Gains Tax in 2024

The 2024 Canadian federal budget introduced important changes to the capital gains tax system, which came into effect on June 25, 2024. Here are the key changes:

• For individuals, the inclusion rate has increased to 66.67% for capital gains exceeding $250,000 in a given year. Gains up to $250,000 still use the 50% inclusion rate.
• For corporations and trusts, the inclusion rate has increased to 66.67% for all capital gains, with no $250,000 threshold.
• The lifetime capital gains exemption limit has increased from $1,016,836 to $1.25 million for qualified small business shares and farm/fishing assets.

These changes make the tax treatment of capital gains more comparable to other forms of income like interest, dividends, and employment income for high net worth individuals.

How to Calculate Tax on a Capital Gain

Calculating tax on a capital gain in Canada involves determining your adjusted cost base (ACB), essentially your original purchase price plus any additional purchase fees. Here’s a step-by-step guide to calculating your capital gains tax:

Step 1: Calculate your capital gain

To find your capital gain, subtract your ACB from the selling price of your asset. For example, if you bought 40 shares of a stock at $10 each and later purchased 20 more shares at $12.50 each, your total ACB would be:
(40 shares × $10) + (20 shares × $12.50) = $650
If you sold 30 of those shares for $15 each, you would receive $450. Your capital gain is the difference between the selling price and the ACB of those 30 shares:
$450 – (30 shares × $650 ÷ 60 total shares) = $125.10

Step 2: Determine the taxable portion of your capital gain

In Canada, only a portion of your capital gain is taxable. As of June 25, 2024, you’ll pay tax on 50% of your annual capital gains up to $250,000. For capital gains exceeding $250,000, 66.67% of the excess amount is taxable.
In the example above, since your capital gain of $125.10 is less than $250,000, only 50% of it ($62.55) would be taxable.

Step 3: Add the taxable portion to your income

The taxable portion of your capital gain is added to your total taxable income for the year. Your marginal tax rate will determine the amount of tax you owe on this additional income.
Many financial institutions track your ACB and capital gains, simplifying the calculation process.

However, if you manage your own investments, you’ll need to keep accurate records and perform these calculations yourself. Remember, the taxable amount is the difference between the selling price and the ACB. If you have any doubts or questions, consult a tax professional for guidance specific to your situation.

What Assets are Subject to Capital Gains Tax?

Capital gains tax in Canada applies whenever you sell any of the following types of property for more than you paid for it:

Investments

• Stocks – Capital gains realized from selling common and preferred shares in Canadian or foreign corporations are subject to capital gains tax. This includes shares purchased directly as well as stocks held within mutual funds and ETFs.
• Bonds – Selling bonds before their maturity date can generate capital gains if sold for more than the purchase price. This applies to all types of bonds, including government, municipal, and corporate bonds.
• Mutual funds – When you sell or switch mutual fund units for more than their adjusted cost base, the capital gain is taxable. Distributions from mutual funds can also contain capital gains.
• Exchange-traded funds (ETFs) – Similar to mutual funds, selling ETF units for more than the adjusted cost base results in taxable capital gains.
• Options – Gains from selling call or put options as the writer of the contracts are considered capital gains.
• Other securities – Less common investments like income trusts, REITs, and mortgage-backed securities can produce taxable capital gains when sold at a profit.

Real Estate

• Rental properties – Capital gains tax applies when selling rental real estate like apartment buildings,plexes, or single family homes for more than the original purchase price plus expenses.
• Vacation properties – Selling secondary residences such as cottages, cabins, or vacation homes can trigger substantial capital gains tax if purchased long ago.
• Land – Undeveloped land and farmland is subject to capital gains tax when sold by an investor or speculator for more than its cost base.
• Commercial real estate – Any real estate held for business purposes rather than personal use, such as office buildings, industrial warehouses, or retail plazas, is subject to capital gains tax upon sale.

Precious Metals

• Gold and silver – Selling gold and silver bullion, bars, coins, certificates, or jewelry for more than the original purchase price results in taxable capital gains.
• Platinum and palladium – Gains from the disposition of platinum, palladium, and other precious metal bullion are likewise subject to capital gains tax.

Business Assets

• Equipment and machinery – Selling business assets like equipment, machinery, furniture, fixtures for more than book value generates capital gains.
• Real estate and buildings – Commercial, industrial, or rental real estate owned by a business is subject to capital gains tax when sold at a profit.
• Licenses and franchises – Transferring or selling licenses, franchises, patents, trademarks, and other intellectual property for more than cost can produce taxable capital gains.
• Inventory – While inventory is generally considered business income, any appreciation when inventory is sold over its cost price could potentially trigger capital gains tax.

Cryptocurrency

• Bitcoin and altcoins – Selling cryptocurrencies like Bitcoin and Ethereum for more fiat currency than original purchase price results in taxable capital gains.
• Stablecoins – Disposing of stablecoin cryptocurrencies pegged to real-world assets like Tether (USDT) can also produce capital gains if sold for profit.
• Crypto tokens – Gains from selling any type of blockchain-based tokens, including security and utility tokens, are subject to capital gains tax.

In addition to the major asset classes covered above, some personal use assets can also be subject to capital gains tax, such as non-primary residences, collectibles like artwork or antiques, and vehicles like cars, boats, or planes when used personally and sold for more than their original purchase price.

How Does Capital Gains Tax Apply to Inherited Assets?

Canada does not levy any inheritance tax or estate tax. As a result, beneficiaries do not need to pay any capital gains tax immediately when assets are transferred to them through inheritance.

However, capital gains tax still applies when the original owner passes away. Any accrued capital gains on assets they owned are deemed to be realized immediately before death. The deceased individual’s estate is responsible for paying capital gains tax on these assets as if they were sold at their fair market value on the date of death.

For example, if you inherit a rental property purchased by the deceased for $300,000 many years ago and now worth $500,000, your estate must pay capital gains tax on the $200,000 gain. The tax would be based on the inclusion rate (50% or 66.67%) and the marginal tax rate of the deceased.

As the beneficiary who inherits the property, you acquire it at a stepped-up cost base equal to the fair market value at the time you inherited it. This stepped-up cost base is $500,000 in this example since that was the value of the property when you inherited it.

When you eventually sell the inherited property, capital gains tax will only apply to any appreciation that occurred after you inherited it. For example, if you sold the property for $600,000 a few years later, you would only pay tax on the $100,000 capital gain.

The stepped-up cost base prevents double taxation and allows beneficiaries to inherit assets without incurring significant capital gains tax, deferring it until disposition.

Here is an overview of how capital gains tax applies when inheriting an appreciated asset:

Here are some other key points about inheriting assets and capital gains tax in Canada:

• Multiple beneficiaries – If more than one person inherits an asset, the capital gain is divided proportionately based on each person’s interest.
• Spousal rollovers – Assets inherited by a surviving spouse can typically be transferred tax-free to defer capital gains.
• Principal residence exemption – Inheriting the family home or cottage does not trigger capital gains tax due to the principal residence exemption.
• Estate planning – Proper estate planning strategies can help minimize the burden of capital gains tax on death.

Overall, beneficiaries do not pay capital gains tax immediately when inheriting assets in Canada. The deceased’s estate pays tax on accrued gains at death, providing the beneficiary with a stepped-up cost base for eventual capital gains tax when the inherited asset is ultimately sold.

Full review: Inheritance Law in Canada

What Are The Strategies to Avoid or Reduce Capital Gains Tax?

While it may be difficult to completely eliminate capital gains tax, there are several strategies that can help maximize deductions and legally minimize the amount of tax owed:

Use Tax-Free and Tax-Deferred Accounts

• Tax-Free Savings Account (TFSA) – Assets held in a TFSA can grow tax-free. Selling investments within a TFSA does not trigger capital gains tax. TFSA contribution room is limited to $6,500 annually.
• Registered Retirement Savings Plan (RRSP) – Capital gains realized within an RRSP are effectively tax-deferred. No tax is payable until funds are withdrawn from the RRSP, at which point the full amount withdrawn is taxed as ordinary income. RRSP contribution room is 18% of earned income, up to an annual maximum ($29,210 in 2023).

Claim Capital Losses to Offset Gains

• Tax-loss harvesting involves strategically realizing losses to offset capital gains. This technique can be used to offset gains in the current tax year or retroactively applied to the previous three tax years. Losses can also be carried forward indefinitely to offset future capital gains.
• Be aware of “superficial loss” rules that disallow claiming a capital loss on assets reacquired within 30 days of selling at a loss.

Defer Asset Sales to Lower Income Years

• Consider an overall financial plan to sell assets strategically in lower-income years. This takes advantage of lower marginal tax rates in those years.
• Deferring tax on accrued capital gains by delaying the sale of assets provides significant advantages, especially for assets with decades of appreciation.

Donate Appreciated Assets Directly to Charity

• Donating securities, real estate, or other appreciated assets directly to a registered charity eliminates capital gains tax.
• The donation receipt is for the fair market value of the donated asset, providing a tax deduction that helps offset the unrealized gain.

Joint Ownership with Your Spouse

• Co-owning assets with a spouse or common-law partner effectively doubles the annual $250,000 capital gains exemption for individuals.
• Careful planning of asset ownership and sales can maximize the combined exemption.

Full review: Common Law Relationships in Canada

Track Expenses to Increase Cost Base

• Capital improvements, commissions, and expenses related to acquiring or selling investments increase the cost base, reducing eventual capital gains. Tracking expenses diligently can provide substantial tax savings.
• Expense records should be retained indefinitely in case of CRA review.

Proper tax planning and smart implementation of these capital gains reduction strategies, combined with professional tax advice, can help minimize an investor’s overall capital gains tax burden.

Here is a summary of these key strategies:

When Capital Gains Tax Must Be Paid

Capital gains tax is not payable until the year in which you actually sell or dispose of an asset for a profit. You report capital gains and losses when filing your annual income tax return for that year.

The taxable portion of any capital gains realized will be added to your income and taxed at your applicable federal and provincial marginal tax rates. It’s important to be strategic in timing asset sales to avoid pushing yourself into a higher tax bracket.

Conclusion

Capital gains tax is an important factor to consider when investing and selling assets in Canada. With the recent changes introduced in 2024, higher income individuals in particular need to be mindful of the increased 66.67% inclusion rate for gains exceeding $250,000 annually.

Fortunately, there are legitimate strategies to help minimize capital gains tax liability, such as capital losses, tax-sheltered accounts, donations, and tax deferral. Consult a qualified tax professional to ensure you develop the optimal plan based on your specific financial situation.

Call to Action

Understanding capital gains tax is crucial for all Canadian investors and property owners. Get started on your personal finance education today and equip yourself to make smart decisions that maximize returns while minimizing unnecessary taxes. Check back regularly for more guides at Life buzz to help you achieve your financial goals.

Frequently Asked Questions (FAQs)

Article Sources:

For a deeper look at our dedication to accuracy, transparency, and independence, please refer to the Lifebuzz.ca Editorial Policy. We take great pride in being Canada’s most trusted news source:

1. Capital Gains Tax in Canada in 2024 – https://www.wealthsimple.com/
2. A closer look at Capital Gains Tax in Canada – https://www.td.com/
3. Capital Gains Tax in Canada – https://www.willful.co/
4. Fair and Predictable Capital Gains Taxation – https://www.canada.ca/