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Capital Gains and Losses
Income Tax Act s. 3(b), 38(a), 248(1)
A capital gain or loss is the gain or loss resulting from the sale of property, such as stocks, bonds, art, stamp collections, real estate, and promissory notes. These sales, including deemed dispositions, must be reported on the tax return, even if the property is located in another country. Gains or losses from bad debts, foreign exchange and call and put options are also normally considered capital gains or losses.
Some assets are considered personal-use property, such as cottages, cars, boats, and furniture (unless these are business assets). Some personal-use property is considered listed personal property (LPP), such as works of art, and stamp collections.
The gains and losses for personal-use property and LPP are calculated separately from gains and losses on other capital assets. See our articles on Listed Personal Property and Personal-use Property for more information.
If income-producing property, or money which is used to purchase income-producing property, is transferred or loaned to a spouse, the income and capital gains from the property will normally be attributed back to the person giving the gift or loan. The treatment is slightly different for transfers to a related minor. See our article on Attribution Rules re Gifts, Transfers, or Loans to a Spouse or a Related Minor Child.
A loss on shares or debt may be considered a business investment loss instead of a capital loss, in certain circumstances. See our article Business Investment Loss and allowable business investment loss (ABIL).
A taxable capital gain is 50% of a capital gain. The capital gain or loss is calculated by deducting the adjusted cost base of the asset plus any outlays and expenses incurred to sell the property from the proceeds received on the sale of the asset.
Taxable capital gains less allowable capital losses for the current year are included in taxable income for the year. However, if allowable capital losses exceed taxable capital gains, there is no deduction in the current year. There will be a net capital loss to be carried back to previous years or forward to future years. When carried back or forward, they are deducted after the calculation of Line 23600 Net Income for Tax Purposes, which is used to calculate clawbacks, some tax credits, and many income-tested benefits.
Because only 50% of the gain is taxable, 50% less tax is paid on capital gains than on income such as interest.
If the property is located in another country, the original cost must be converted to Canadian $ using the exchange rate at the time of the purchase, or at the time of becoming a Canadian resident. The proceeds must be converted to Canadian $ at the time of the disposition. There may be a foreign tax credit for taxes paid on the gain in the other country, depending on the tax treaty (if any) between Canada and the other country.
Note that a cottage (i.e., 2nd home) may be able to qualify for the principal residence exemption, even if located in another country.
An allowable capital loss is 50% of a capital loss. It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income.
When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year. See our article on Capital Losses for more information about carrying these losses back or forward, and for the treatment of capital losses on the death of a taxpayer.
If you plan to sell shares at a loss and buy them back either before or after selling them, see our article on Superficial Losses to ensure that your loss isn't disallowed.
Losses on transfers of shares to an RRSP, TFSA, DPSP or RDSP are not deductible.
Capital gains and losses are recorded on Schedule 3 of the personal income tax return, by reporting the proceeds of disposition less the adjusted cost base. 50% of the excess of capital gains over capital losses is the taxable capital gain for the year, which is reported on line 12700 of the tax return. See our article on Capital Losses for information on where net capital losses carried forward are deducted on the tax return, and how they are treated for a deceased taxpayer.
When a capital property is owned by more than 1 person, such as a taxpayer and spouse, the proceeds of sale would normally be allocated to each owner based on their percentage ownership. However, there can be potential problems with joint ownership. See Joint Ownership of Assets and in the same article, Beneficial Ownership vs Legal Ownership.
When a Canadian controlled private corporation (CCPC) has a capital gain, the non-taxable portion of the capital gain can be paid out to shareholders as a capital dividend on a tax-free basis.
Capital gains can be reduced, deferred, or eliminated by:$750,000 lifetime capital gains exemption - increased to $800,000 for 2014, then indexed for inflation
Principal residence exemption, which can also be used for a vacation home or cottage
Donating capital property instead of cash can eliminate capital gains or increase your donations limit
Capital gain reserve - you may be able to spread your capital gain over a number of years
Prior to 1994 there was a $100,000 capital gains exemption which could be used for all capital gains. On February 22, 1994, the federal government announced that the exemption would no longer be available for capital property or eligible capital property sold after February 22, 1994.
A one-time election was made available to allow those who owned capital or eligible capital property at February 22, 1994, to report a capital gain on their 1994 tax return in order to take advantage of the unused portion of their $100,000 capital gains exemption. The election was made on form T664, and you may have had to also complete forms T657, Calculation of Capital Gains Deduction on All Capital Property, and Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 1994. It was possible that not all of the declared capital gain would be exempt, depending on the CNIL balance.
Once form T664 was completed for a real estate property, the new adjusted cost base was entered on the Capital Gains Election Supplementary page, in Chart B - Other Capital Properties. When spouses completed this election for a jointly-owned property such as a vacation home or cottage, they would each have declared 50% of the capital gain, so the Chart B new adjusted cost base would be 50% of the new adjusted cost base for the property.
More information on the 1994 election is available in the 1994 Capital Gains Election Package (pdf).
Capital Losses - carry-back rules, inclusion rates (IR) for prior years
Business investment loss and allowable business investment loss (ABIL)
Tax Tip: Only 50% of a capital gain is taxed, and the gain is not included in income until the item is sold, allowing you to compound your returns tax-free until you sell.
Revised: October 26, 2023
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