Capital Gains Tax – The Complete Guide For 2019

We all want to pay the least amount of taxes possible on our belongings. However, the government collects something called capital gains tax on the sale of specific items or securities. Whether you’re buying stocks, getting paid interest or dividends, or purchasing real estate, you could be hit with capital gains. In this guide, I’m going to explain everything you need to know about capital gains, and if you’d like to quick jump to a section, simply click a link below:

What is the capital gains tax?
When did capital gains tax begin?
What about the capital gains exemption?
Figuring out my capital gain
Figuring out the taxes on my capital gain
Alberta
British Columbia
Saskatchewan
Manitoba
New Brunswick
Newfoundland
Nova Scotia
Ontario
PEI
How to report capital gains
How to avoid capital gains on:
Stocks/Other investments
Real estate
How to defer capital gains tax
Capital losses

What is capital gains tax?

By definition, a capital gains tax is a levy on the profits realized by a sale. Not all sales are faced with capital gains however.

Typically, capital gains come from but are not limited to, the sale of the following:

  • Stocks
  • Bonds
  • Metals
  • Real estate
  • Art

So no, you won’t have to pay capital gains on a vintage nintendo system you bought back in the 1990’s and sold today for triple the price. Typically, if your ACB and cost of disposition (which we will talk about below) are less than $1000, there is no need to report the capital gain or loss.

However, if you’ve purchased a stock that has increased in value or a piece of art that has appreciated you may be subject to paying capital gains on the money you receive when you sell. The government defines these as “Capital Properties” and you can find out exactly what they mean by this on their definition of capital gains page.

When did capital gains come to fruition?

The Government of Canada instituted capital gains in 1972. Prior to this, you were free to buy and sell residences, stocks, collectible items, and anything else that you felt would appreciate in value without paying a tax on the future earnings.

Canada, compared to the United States, introduced capital gains tax much later. In the United States, capital gains were taken into account as early as 1860. In Britian, capital gains were put into place in the early 1960s.

As we live in a country with more social benefits, the government needs ways to fund these benefits. This is one of the primary reasons the tax was introduced, and although you are frustrated with it, as a middle to low income Canadian there are a lot of ways to avoid or defer capital gains, which we will get to later on in this article.

Capital gain exemptions – They probably don’t apply to you

There was a time where the average Canadian was granted an exemption of $100 000 when facing capital gains. What this means is over the course of your life, you could claim gains and use some of your tax exemption and pay no tax at all. However, in the early 90’s this rule was abolished. There are now some specific circumstances you must match to be eligible for an exemption:

  • Your shares in a Qualified Small Business. You must own the shares for longer than 24 months.
  • Qualified Farm Properties. 
  • Qualified Fishing Properties

The exemption for these types of properties can vary. For example, as of 2019 the capital gains exemption for Qualified Farm Properties was $1 million. This exemption is cumulative, which means if you ended up using $500 000, you only have $500 000 left.

I’ve come across many investors asking about capital gains, specifically how they can avoid paying them. They often bring up this tax exemption, thinking that their stocks in a publicly listed company could qualify for a small business exemption. This is not the case, and as a run of the mill investor in Canada, your exemption is more than likely going to be $0.

Calculating Capital Gains in 2019

One of the main things you need to know about this tax is that only 50% of your capital gains are indeed taxable.

A quick example. If you buy a piece of art for $10 000 and sell it 5 years later for $50 000 you’ve realized a capital gain of $40 000. However, only $20 000 of that is subject to tax.

So how exactly are you taxed on it?

To calculate your exact capital gain, you must have 3 things.

Your adjusted cost base

Your adjusted cost base is the cost of a capital property plus any expenses it took you to acquire that property. So for example, if you purchase a home for $400 000, your ACB is $400 000. If you’ve purchased $5000 in stocks, your ACB is $5000 (stocks are eligible under another rule detailed a little bit further down however.)

Your outlays and expenses incurred

We all know that the buying and selling of items often doesn’t come free, especially with things like real estate and stocks. So, the government allows you to include these to save some money. Your outlays and expenses incurred can include any fees or commissions it costed you to sell a property. Some quick examples of outlays and expenses:

  • That home you bought above for $400 000. If you had to pay a realtor $10 000 to purchase the home, you can include that.
  • If those $5000 in stocks you bought cost you $50 in commission, that can be claimed as well.
  • If you’ve sold a piece of art at auction that costed you a $500 fee, it can be claimed as an expense.

The proceeds of disposition

The proceeds of disposition is often just the sale price of a capital property. For example, a home you purchased for $400 000 ten years ago and sold today for $600 000, your proceeds of disposition would be $600 000.

The exception with stocks – Identical properties

Dollar cost averaging is a popular investment strategy. Although we aren’t going to dive into it too much (you can find more info on it on our how to buy stocks guide) it is the practice of buying a set amount of equities each month regardless of price. So, if you’ve bought 100 stocks at $10, another 100 at $15 and another 100 at $20, how do we figure out our adjusted cost base?

We simply calculate the average we have paid for all of the identical properties.

100 x 10 = $1000
100 x 15 = $1500
100 x 20 = $2000

Total cost = $4500 for 300 shares. 

$4500/300 = $15 dollars a share.

If at one point you decide to sell some of your shares, this is the new adjusted cost base you will follow. So, for example, if you were to decide to sell 100 shares when the stocks price was $18, you would have to claim a capital gain of $300 ($18 sell price – $15 ACB.)

Or, if you were to decide to sell 100 shares when the stock price hit $14, you would actually have a capital loss ($14 sell price – $15 ACB.) Even though you’ve purchased shares for $10 at one point, the purchase of identical properties has pushed your ACB up above the $14 mark.

After you have these numbers, you can figure out your capital gain

You’ve figured out your adjusted cost base (ACB), your outlays and expenses (O&A) and your proceeds of disposition (POC). Now it’s time to calculate your capital gain. The process is actually quite simple.

Capital Gain = POC – (ACB + O&A)

So, if you’ve purchased 100 shares in company ABC for $2000 with a commission of $50 and sold them later on for $6000, your capital gain would be as follows:

$6000 – (2000 + 50) = $3950

You’ve got your capital gain, now lets figure out how much tax you’ll pay

As soon as you’ve figured your capital gain, much like the one above, it’s now time to calculate how much tax you’ll pay on that gain.

First things first, divide your capital gain in half. Why?

Only half of your capital gain is taxable. So if you’ve sold a home for $600 000 and paid $400 000 (including your outlays and expenses), you’ve realized a capital gain of $200 000. However, only $100 000 is taxable.

In order to determine how much your capital gain is going to be taxed, we’ve created these tables outlying each provinces tax rate. Keep in mind, these tax rates are the combined rates (what you would pay as a whole, as they include federal and provincial rates.)

**These tables already have the reflected capital gains rate of 50% factored in. If you’ve made $10 000, you will be charged the full rate of tax on this chart. It is half of your marginal tax rate as shown in the table, so they are already factoring in that you are only taxed on half of your capital gain**

Alberta Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $47,63025%12.5%
2$47,630 to $95,25930.5%15.25%
3$95,259 to $131,22036%18%
4$131,220 to $147,66738%19%
5$147,667 to $157,46441%20.5%
6$209,952 to $210,37143%21.5%
7$210,371 to $314,92847%23.5%
8over $314,92848%24%
9$157,464 to $209,95242%21%

British Columbia Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $40,70720.06%10.03%
2$40,707 to 47,63022.70%11.35%
3$47,630 to $81,41628.20%14.10%
4$81.416 to $93,47631%15.50%
5$93,476 to $95,25932.79%16.40%
6$95,259 to $113.50638.29%19.15%
7$113,506 to $147,66740.70%20.35%
8$147,667 to $153,90043.70%21.85%
9$153,900 to $210,37145.80%22.90%
10over $210,37149.80%24.90%

Saskatchewan Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $45,22525.5%12.25%
2$45,225 to $47,63027.5%13.75%
3$47,630 to $95,25933%17.5%
4$95,259 to $129,21438.5%19.25%
5$129,214 to $147,66740.5%20.25%
6$147,667 to $210,37143.5%21.75%
7over $210,37147.5%23.75%

Manitoba Tax and Capital Gains

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $32,67025.8%12.9%
2$32,670 to $47,63027.75%13.88%
3$47,630 to $70,61033.25%16.63%
4$70,610 to $95,25937.9%18.95%
5$95,259 to $147,66743.4%21.7%
6$147,667 to $210,37146.4%23.2%
7over $210,37150.4%25.2%

Ontario Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $43,90620.05%10.03%
2$43,906 to $47,63024.15%12.08%
3$47,630 to $87,81329.65-31.48%15.74%
4$87,813 to $95,25933.89-37.91%18.96%
5$95,259 to $147,66743.41%21.71%
6$147,667 to $150,00046.41%23.21%
7$150,000 to $210,37147.97%23.99%
8$210,371 to $220,00051.97%25.99%
9over $220,00053.53%26.77%

New Brunswick Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $42,59224.68%12.34%
2$42,592 to $47,63029.82%15.41%
3$47,630 to $85,18435.32%17.66%
4$85,184 to $95,25937.02%18.51%
5$95,259 to $138,49142.52%21.26%
6$138,491 to $147,66743.84%21.92%
7$147,667 to $157,77846.84%23.42%
8$157,778 to $210,37149.3%24.65%
9over $210,37153.3%26.65%

Newfoundland Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $37,59123.7%11.85%
2$37,591 to $47,63029.5%14.75%
3$47,630 to $75,18135%17.5%
4$75,181 to $95,25936.3%18.15%
5$95,259 to $134,22441.8%20.9%
6$134,224 to $147,66743.3%21.65%
7$147,667 to $187,91346.3%23.15%
8$187,913 to $210,37147.3%23.65%
9over $210,37151.3%25.65%

Nova Scotia Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $29,59023.79%11.9%
2$29,590 to $47,63029.95%14.98%
3$47,630 to $59,18035.45%17.73%
4$59,180 to $93,00037.17%18.59%
5$93,000 to $95,25938%19%
6$95,259 to $147,66743.5%21.75%
7$147,667 to $150,00046.5%23.25%
8$150,000 to $210,37150%25%
9over $210,37154%27%

Prince Edward Island Tax and Capital Gains:

wdt_IDTaxable IncomeNormal Tax RateCapital Gains Rate
1First $31,98424.8%12.4%
2$31,984 to $47,63028.8%14.4%
3$47,630 to $63,96934.3%17.15%
4$63,969 to $95,25937.2%18.6%
5$95,259 to $147,66742.7% - 44.37%22.19%
6$147,667 to $210,37147.37%23.69%
7over $210,37151.37%25.69%

A few quick examples from different provinces

John has owned stock ABC for 5 years. His Tax Free Savings Account and RRSPs are maxed, so he’s been forced to buy this stock in a non registered margin account. He purchased the stocks at 3 different price points over that 5 years:

  • 100 shares at $14.63
  • 100 shares at $19.03
  • 100 shares at $24.03

We must first calculate his adjusted cost base. Considering he is going to be selling all the stocks, it’s a fairly simple calculation. We take his three total purchase amounts ($1463, $1903, and $2403) and divide them by 300, which leads us to a ACB of $19.23. Lets assume John paid $50 in commission per transaction.

John has decided to sell his stocks at a price of $29.05. In order to calculate his capital gain, we take his proceeds of disposition ($29.05) and subtract his adjusted cost base plus his expenses and outlays.

$29.05 x 300 – ( $19.23 x 300 + $150) = $2796.

Lets assume John is a middle class Canadian making around $75 000 a year. Here is the capital gain tax he must pay in the particular provinces:

wdt_IDProvinceCapital Tax Owing
1Alberta$426.39
2British Columbia$394.23
3Saskatchewan$489.30
4Manitoba$529.84
5Ontario$440.09
6New Brunswick$493.77
7Newfoundland$507.47
8Nova Scotia$519.77
9PEI$520.05

As you can see, calculating your capital gains isn’t really a complicated process. Of course, it isn’t really a necessity to figure out your total taxes needing to be paid in each province. Your online program like TurboTax or your accountant will be able to figure this out for you.

As you can see from the table above, there are some pretty significant differences in capital gain taxes owed in each province.

How to report capital gains

Reporting capital gains or capital losses (which has its own section in this article) is fairly easy. If you file your taxes yourself, simply use this guide to calculate your total capital gain, and then use the government’s Schedule 3 Form to claim your gains or losses.

If you use an accountant or an online tax filing program like TurboTax the process is even simpler. More than likely all you’ll need to do is give your total capital gain to your accountant, and they will plug the numbers into the applicable form. An online tax program should ask you if you’ve earned any capital gains throughout the year. If they don’t, you’ll be able to easily find the Schedule 3 Form within their documents and add it to your digital return.

How to avoid capital gains tax

We all want to pay as little in taxes as we possibly can. Fortunately, the Government of Canada has given us certain exceptions and exclusions on particular profits that will avoid a capital gains tax.

How to avoid capital gains on stocks and other equity investments

Stocks, bonds, and mutual funds are probably the most common investment we make that incurs capital gains. However, there are multiple ways to avoid getting charged tax on your earnings.

Place your investments in a tax-sheltered account

This is one of the easiest ways to avoid paying capital gains on your investments. Accounts like the TFSA and RRSP are generally not taxed on interest, dividends, or capital gains.

One key difference between the TFSA and RRSP in terms of taxes is that the TFSA is never taxed, unless you’ve got yourself into some trouble in terms of trading within your TFSA. The RRSP on the other hand is tax free until you choose to withdraw the funds. This is why it is best to contribute to your RRSP at your highest point of income, and withdraw at your lowest point, such as when you’re in retirement. 

That being said, both accounts will shelter you from having to pay capital gains on the profits made within them over the short term.

Gifting a stock

I know, this one seems a little nonsensical. We’re trying to avoid paying capital gains, so we donate the whole amount to a charity? Well, hear me out at least, because if you’re considering doing this, there is a right way, and a horrible way.

If you’re considering donating an investment to a charity, here is the wrong way to do it:

Sell the stock, withdraw the money from your account and give the charity the proceeds from the sale.

And, here’s the right way:

Donate the stocks to the charity with a certificate form with no sales needed.

So, why is one wrong and one right? Well, if you sell the security and then donate it to charity, you’ve triggered a capital gain. You now hold xx amount of dollars instead of xx amount of shares of company XYZ. You’ll then need to take 50% of the money from that sale and pay the government tax on that money.

However, if you donate the stocks themselves to the charity, you don’t have to pay any tax on the appreciated investment.

Hold on to the stock

We only pay capital gains on investments we sell. If you’re currently working at your highest level of income and sell a equity, you’re exposed to the highest level of capital gains tax you’ll encounter. However, holding on to the stock allows you to generate more income off the stock in the form of dividends and stock appreciation. 

There may be situations where you are forced to sell, such as the overvaluation of a stock or simply the failure of a company in general. However, it should be your absolute last resort to sell the equity unless it is in a tax sheltered account where you won’t be forced to pay capital gains ever (TFSA) or at least immediately (RRSP.)

Loan money to a low income partner

If you have a common law partner or spouse, you can take advantage of a spousal loan. Canada Revenue Agency prescribes interest rates every quarter. These interest rates are what you must loan your spouse or common law partner money at.

So how does this benefit you? As the higher income partner, you may be exposed to a higher bracket of capital gains if you were to sell a stock. It may be beneficial to loan your spouse money, and then they purchase the stock. For example, if you currently make $120 000 and live in Alberta, you will be forced to pay 18% on a sold capital property. However, with a spousal loan to a spouse or common law partner that only makes $40 000 a year, they would only have to pay 12.5% on the capital property.

How to avoid capital gains on real estate

Real estate is where we have the possibility of facing heavy capital gains. Due to purchasing an investment with such high leverage (in the case of a 5% down payment, 19:1), we have the potential to make a lot of money. However, there are a few exceptions where you can avoid capital gains on real estate.

With a real estate market that seems to keep going up, chances are your first home purchase will incur a capital gain. However, the Government of Canada has allowed some leniency on this. If you are selling your principal property, as in the home you have lived in, you will be able to avoid a capital gain tax if you adhere to the following condition:

Selling your principal residence

The home has been your principal residence for every year you have owned it.

What this means is if the home has been your principal residence for 3 years and then you purchase another home and decide to rent that one out, it is no longer your principal residence.

And in terms of land, it’s important to note that the land you own does not qualify as a residence. Typically, you will be exempt from capital gains on about 1.25 acres, unless you can prove that more land is needed to enjoy your principal residence. A prime example of this is if you originally purchased a 2 acre lot from the municipality. 

If you own a 200 acre farm, the whole 200 acres is not considered your principal residence. However, as noted at the start of this article, farmland has the potential to be exempt from capital gains.

Contributions to tax deferred accounts

If you’ve got some room in your RRSP, this is a perfect opportunity to offset your capital gain tax on your real estate property. 

If you own a property that is subject to capital gains, chances are you live in your current home, deemed your principal residence. So the equity within a home that is sold isn’t needed to parlay into your next down payment unless you plan to purchase more rentals.

If you sell a home and receive $50 000 in capital gains from doing so and have $40 000 in contribution room in your RRSP, you can defer 80% of that capital gain by placing it in the account. You’ll be charged a capital gain on $50 000 yes, but you’ll be given a tax deduction on your $40 000 contribution to your RRSP, somewhat balancing it out.

If you plan to turn the equity within your sold home into more properties, then this method probably isn’t the best for you.

Transfer real estate before death

Many parents are hoping to give their fortunes to their kids. However, there are ways to go about it correctly, or incorrectly. In terms of real estate, it’s wise to gift real estate to heirs before their parents pass away. Why?

Older generations in retirement are more than likely at one of the lowest tax brackets possible. If they gift you the property at this time, they are “selling” or disposing the property to you and will be charged capital gains tax according to their current tax bracket.

However, if they pass away and assets are liquidated into their estate, their estate will be taxed as a total amount. And more than likely, depending on how much your parents really owned, it will push their marginal tax rate higher, thus you will pay more capital gains.

How To Defer Capital Gains

There are some specific ways you can defer capital gains. Keep in mind, defer does not mean avoid. It simply means put off until a later date.

Gifting to a spouse or common law partner

If you gift something like a stock or bond to a common law or spouse, it does not trigger disposition (the “sale” of a capital property.) As such, you are free to do so and not pay capital gains.

However, keep in mind that you, as the gifting partner, are on the hook for all capital gains once the asset is sold. For example, if you gift your wife $10 000 in shares of stock ABC and the stocks are eventually sold, you will be on the hook for the capital gains.

Carrying forward capital losses

Capital gains are when you’ve realized a gain from a capital property. As such, capital losses are when you’ve realized a loss from a capital property.

The best part about capital losses is the fact that they can be carried forward indefinitely. 

That means a lower income investor in their 20’s who’s made a few mistakes in the stock market in a non tax-sheltered account can wisely carry forward these losses into their later years when their tax bracket is higher.

Capital gains reserve

If you’re looking to reduce the amount of capital gains you must pay at once, a capital gains reserve may be the best way to go about things.

Lets say you hold a piece of art you paid $5000 for and the price has appreciated to $50 000. You’re on the hook for a capital gain of $45 000, $22 500 which is taxable. 

However, if you organize with the seller a specific payment plan, lets say $20 000 up front and the remaining payment made at $10 000 a year, you’ll  be able to claim a reserve. This means you’ll only be charged capital gains tax on whatever you’ve received that year.

Some key things to note:

  • The maximum length of a reserve is 5 years, or 10 years in cases of farm or fishing property.
  • You cannot claim a reserve if you sold the capital property to a corporation that you control.

Capital Losses

Capital losses are just as they sound, the opposite of capital gains. When you sell a capital property for a loss, you’re able to claim that loss (under particular circumstances.) These losses, as I’ve noted above, can be carried forward indefinitely. So, under extreme circumstances, if you’ve dabbled in the stock market in a non tax sheltered account and lost $30 000 in your twenties, you can carry that loss forward and apply it to a rental property sale in your 40s.

Speculative stocks within a tax-sheltered account

There are some benefits to tax-sheltered accounts as I have gone over in this article. However, there are also some downfalls. Within tax sheltered accounts like the RRSP and TFSA, you cannot claim capital losses. Because capital gains are not applied to sales of equities in these accounts, the government doesn’t allow you to claim capital losses.

So the general consensus by most experts is that speculative investments should be held outside of these accounts. That way, if an investment goes wrong, you’re able to claim the capital loss and apply it to a capital gain when you need to.

Superficial losses

If you’re looking to claim a capital loss in Canada, there is one rule in particular you need to know about, and that is the superficial loss rule. If you’ve invested in a stock, mutual fund, real estate property, or anything else considered a capital property and sold it, you cannot buy that capital property back within 30 days. If you do, the government will not allow you to claim the capital loss.

However, there are some ways to avoid this. If you’ve decided to sell your shares in a popular oil and gas company to claim a capital loss to offset some capital gains you’ve earned in the cannabis industry, but have heard news of the oil and gas industry possibly on the up and up, you can purchase an oil and Gas ETF.

Capital Losses Must Offset Capital Gains

Unlike an RRSP contribution, capital losses cannot be used to lower your overall income.

If you’re claiming a capital loss, the capital loss must be used to offset capital gains. For example, if you have a capital gain of $3000 in a tax year and a capital loss of $4000, you have a net capital loss of $1000. You won’t pay any tax on your capital gain, and your capital loss of $1000 can be applied to the previous 3 years of tax returns or carried forward indefinitely.

However, what you can’t do is claim this $1000 on your taxable income. For example, if you earn no capital gains in a year and earn $71 000, the capital loss cannot offset your income to $70 000.

This rule includes business income. You cannot use your capital losses to offset your business income.

Wrapping it up

Capital gains can been seen as a nuisance by most, but when you really look at it, it will be one of the cheapest taxes you pay here in Canada.

Use the strategies outlined in this article to reduce, defer, or even eliminate your potential capital gains tax here in Canada and take advantage of programs and exclusions the government has put into place to allow Canadians to reduce their overall tax burden. Examples of these may be placing investments into an RRSP or TFSA rather than a non registered margin or non margin account.

Keep in mind, capital gains are typically excluded from TFSA investments, but can be implemented if the government feels you are using your TFSA to trade stocks.

2 thoughts on “Capital Gains Tax – The Complete Guide For 2019”

  1. Excellent article. Many thanks.
    One glaring grammatical error – It should be ‘Principal’ residence.
    Principle is what Trudeau lacks.

    • Thanks Warren, not sure how that slipped the editor! I’ve made the changes, and I definitely agree with you on Trudeau 😉

      Cheers

      Dan

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