6 things to know about capital gains.
March 10, 2023
Did you sell property for more than you bought it? Or, did your stocks sell at a higher value than you originally invested into them? Congratulations! Now that you’ve made a profit from your investment, you might have to report a capital gain on your tax return.
You’ll have a capital gain when you make a profit off of selling investments like shares, bonds, debts, lands or buildings. You’ll need to report this amount on Schedule 3 (and Schedule G, if you’re a Québec resident) of your return.
Here are 6 things to know about how capital gains might affect your tax situation.
1. Learn how capital gains are taxed.
Capital gains are 50% taxable. The amount of tax you pay on a capital gain depends on your annual income. That means 50% of the amount you made from selling your investment is added to your income, and then your personal tax rate is applied to the total. The higher your tax bracket, the more tax you’ll pay on your capital gains.
For example, let’s say you bought a building for $400,000 and sold it for $500,000. You’ll need to add half of your profit to your income for the year. Because your profit was $100,000, you’ll report $50,000 as a taxable capital gain. Your personal tax rate is then applied to the total amount of income you reported to determine how much tax you owe.
2. Learn the difference between capital gains and losses.
If you sell an investment for less than you paid when you bought it, you have a capital loss. A capital loss can be applied against any capital gains you had during the year to lower the taxes you owe on that amount. If your capital losses are more than your capital gains, you have unused capital losses. You can carry back your unused capital losses to reduce your taxable gain in any of the past 3 years, or carry them forwards to reduce your taxable gain in a future year.
3. Organize your documents.
When declaring capital gains, documents related to the acquisition (when you bought it) and disposition (when you sold or transferred it) are a must-have. You’ll need to keep record of details such as:
- The date you purchased it
- The purchase price
- Commissions and any other relevant expenses
- The adjusted cost base (ACB) (the cost of a property plus any expenses you paid to acquire it, such as commissions and legal fees, plus any additions or upgrades made to property); and
- If you have stocks, records of the number of shares sold, as well as the name of the fund or corporation and the class of shares.
The information you’ll need can usually be found on multiple documents, so you’ll have quite a few papers to keep track of:
- If you sold shares, mutual funds, or other Canadian securities, you’ll receive a T5008 slip (or an RL-18 slip, if you’re a Québec resident) from your broker. Your broker will also send a copy of this slip to the Canada Revenue Agency (CRA) and Revenu Québec (if applicable).
- If you sold a building or a plot of land, you won’t receive an information slip. However, you’ll need to keep all the documents related to the sale, in case the CRA or Revenu Québec ask to see them.
- If you’re the beneficiary of an estate or if you have mutual funds you haven’t sold yet, you’ll receive a T3 slip (or an RL-16 slip, if you’re a Québec resident) reporting the income from your trust.
- If you hold mutual funds through a corporation instead of a trust, you’ll receive a T5 (or an RL-3 slip, if you’re a Québec resident).
- If you’re a member of a business partnership, you’ll receive a T5013 slip (or an RL-15 slip, if you’re a Québec resident) from your partnership reporting your share of the partnership income or loss.
Having your documents in order will save you when it’s time to file. Be sure to keep all your documents for at least 6 years – the CRA and Revenu Québec can request to see them at any time if your return is selected for a detailed review.
4. Determine if your gain is a sale or gift.
If you give your investment away for free to someone who isn’t your spouse, you’ll be taxed on the same amount of capital gains you would have realized if you had sold your investment for its fair market value (FMV) (the highest price in Canadian dollars that your investment is worth). This also happens if you sell your investment for less than its value to a family member who isn’t your spouse. This means that even if you didn’t sell your investment for a high price, you might still have to pay tax on a high amount of capital gains.
If you sell your investment for less than its value to someone who isn’t your family member or spouse, your capital gains will match what you actually sold it for.
For example, let’s say you bought a building for $400,000. Today, the FMV is $600,000. Here’s how your capital gain will be determined in 4 possible scenarios.
You sell the building for its FMV.
If you sell the building for its FMV of $600,000, your taxable capital gain will be $100,000.
You sell the building to a family member.
If you sell the building to a family member for $500,000, the government will consider your investment sold for its FMV, meaning your taxable capital gain will still be $100,000.
You give the building to a family member as a gift.
If you give the building to a family member as a gift, the government will consider your investment sold for its FMV, meaning your taxable capital gain will still be $100,000.
You sell the building to someone who isn’t your family member.
If you sell the building to someone who isn’t your family member for $500,000, the government will consider your investment sold for its actual price, meaning your taxable capital gain will only be $50,000.
5. Figure out if you can split your gain with your spouse.
Generally speaking, you can’t split capital gains with your spouse (or common-law partner) in order to reduce the taxes you owe. This is due to the CRA’s attribution rules. which means that if you transfer an investment to your spouse, you – not your spouse – will have to report any capital gains (or losses) that result from the transfer of that investment on your return.
However, if you and your spouse purchased the investment together, you’ll split the capital gains based on how much each person invested. Let’s say you and your spouse bought a cottage a few years ago and each of you paid 50% of the purchase price. In that case, you’ll be able to split the capital gains that arise from the sale of the cottage, equally.
6. Plan for your gain.
If you know you’re going to sell your investment for more than you bought it, you can plan ahead to lower the taxes you’ll owe on your profit. For example, selling some losing stock might balance things out or create a capital loss, or you can contribute more to an RRSP to lower your tax payable for the year.
If your income happens to fluctuate, you can also report your capital gain in a year when your income is lower than usual. This means you might be in a different tax bracket so you’ll need to pay less tax on your capital gain when it’s time to file.
Have questions about reporting your capital gains (or losses)? Get help from the largest network of reliable Tax Experts by choosing one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.