What are capital gains?
When you sell an asset or investment for more than you bought it, you have a capital gain. Let’s say you purchased $1,000 worth of stock and then sold your shares for $1,500 two years later. In this case, you have a capital gain of $500. On the other hand, when your assets depreciate in value and you sell them for less than you bought, you have a capital loss.
Capital gains and losses can occur with many types of investments and property, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), rental properties, cottages and business assets. Capital gains and losses generally do not apply to personal-use property where the value generally decreases over time, such as cars and boats. There may be exceptions for personal-use property like rare coins or collector cars. Capital gains tax does not apply to real estate that qualifies as your principal residence for all years you owned it.
How are capital gains taxed in Canada?
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Capital gains are often considered a form of “passive income.” However, they’re taxed differently than other passive income sources, such as interest income, Canadian dividends and foreign dividends. They’re also taxed differently than employment income, due to what’s known as the capital gains inclusion rate. In this sense, capital gains are unique.
The first thing to know is that capital gains are added to your income for the tax year in which they are earned—just like employment income. As long as the gain is “unrealized,” meaning the asset remains in your possession, you do not have to pay taxes on it. So, capital gains can be deferred more easily than other passive income sources. The difference is that, unlike employment income, which is fully taxable, only a portion of a capital gain is actually taxed. As of June 25, 2024, the federal government changed Canada’s capital gains inclusion rates. We will take a closer look at the new rates in a moment.
The second factor that determines the tax paid on a capital gain is your total income for the year. In this sense, you could say capital gains are comparable to regular employment income. As you earn more income, you climb further up Canada’s federal and provincial/territorial tax brackets—also known as marginal tax rates. Your marginal tax rate refers to the rate at which your next dollar earned will be taxed, according to those brackets.
Under Canada’s progressive tax system, individuals are taxed at different rates, whether the income is from capital gains or employment. This means there’s no single “capital gains tax rate” in Canada, because your rate depends on how much you earn that year.
To know how much you’ll owe in capital gains tax, you must figure out your total income for the year, your federal and provincial/territorial tax brackets, and your capital gains inclusion rate.
What is the capital gains inclusion rate?
Previously, Canada had a single capital gains inclusion rate of 50%. This rate applied to individuals, trusts and corporations. This situation changed as of June 25, 2024, when the federal government increased the inclusion rate for individuals—in some cases—as well as for trusts and corporations in all cases.
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