Capital Gains & Investing

by Tax Guy - Burlington Accountant on February 24, 2011 Print This Post Print This Post

Let’s face it! Most Canadians probably find income taxes boring (unless of course, you’re an accountant!). But paying your income taxes is a necessary evil!

If you have sold stocks or other investments at a profit, you will have to pay the tax on your capital gains.

A Quick Note About Your RRSP or RRIF

If you have stocks or other investments inside of your RRSP or RRIF, any gains generated on those investments are not taxable. However, withdrawals are fully taxed at your marginal tax rate at the time you withdrew from the account.

Remember that the government wants you to save for your retirement using the RRSP and allows you to deduct deposits and allows your investments to grow tax-free … until you withdraw from the account: And hopefully in a lower tax bracket.

What About The TFSA?

Like an RRSP or RRIF, investment income in the TFSA will grow tax free. However, there are no tax consequences if you deposit or withdraw from the TFSA.

From here on, I will refer to the RRSP, RRIF, and TFSA collectively as registered accounts.

What Is A Capital Gain?

When you sell your stocks, in a non-registered account, for more than you paid for it, the difference between the selling price and purchase price (less commissions) is called a capital gain. In Canada, capital gains offer a tax advantage because only 50% of the net capital gains are taxable.

Notice the phrase net capital gains?

If you had capital losses in the tax year, you are required to offset them against your capital gains from the same tax year. If you have losses left over, you can use them against any net capital gains in the last three years or use them against any capital gains in the future. However, you cannot use capital gains against other income (interest, dividends, employment income etc.).

If you dispose of the shares of a qualified small business corporation or qualified farm property you can shield $750,000 of the gain from tax! ?In 2007 government in increased the lifetime capital gains exemption to $750,000.

Watch Out For Superficial Losses

If you’re frequently buying and selling stocks and you have losses, be aware that if you (or a person related to you), owned the same stock 30 days before or after you sold the shares, your loss will be denied. You should read my article on Superficial Losses for more on this.

Tax Tips For Capital Gains

  • Maximize Tax Efficiency – Keep your capital gains generating investments outside of your registered accounts and your interest generating investments inside your registered accounts.
  • Tax Loss Sell – If you have shares that have lost value at the end of the year, consider selling them to offset and capital gains. Be aware of the superficial loss rules.

Getting Help

If you have significant trades outside of your RRSP’s, a professional accountant will understand the implications of capital gains and can advise you on appropriate strategies to pay less tax.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 126 comments }

Maria February 19, 2012 at 5:18 pm

If I buy my partners out, can I keep my capital gains in the property?

Tax Guy February 19, 2012 at 9:00 pm

The purchase of property is considered a disposition for ta purposes. You’ll be acquiring their interest at FMV and they are disposing at FMV. So unfortunately no, you can’t retain the capital gains.

This would affect the other owners and not you and should not be your issue. Your objective is to bring the cost base up.

The caital gain is something the seller needs to deal with.

Miriam March 11, 2012 at 10:21 am

My elderly parents own a house in Quebec worth about $400,000 if it were upgraded to good gondition. They want out, but they want to sell it themselves and my mother is a hoarder. If my sister bought it for $200,000 (she’s 58) and my brother fixed it up, and then she sold it for 400,000, what would be her tax liability? She lives in Alberta. If she then divided the money and gave say, $100,000 to my brother Ontario) and $100,00 to me (USA), what tax ramifications would follow? We just want to get them out so they can move to an apartment where he doesn’t need to shovel snow etc., and for health reasons.

Tax Guy March 11, 2012 at 2:54 pm

The cost is purchase price plus improvements. The tax liability is the gain time tax rate.

Henry March 14, 2012 at 10:59 am

My sister and I own a rental property in Montreal. Because it is her principal residence I sold her my half of the property and after paying my share of the outstanding mortgage I am left with a $65,000 profit. Will I have to pay capital gains tax on 50% of the $65,000 at my marginal tax rate? Or, will I have to pay 50% on the actual sale price which was much higher?

Tax Guy March 15, 2012 at 8:09 am

Henry,
The gain or loss is what you paid to your sister less 1/2 of the cost (assuming the ownership was 50/50) to arrive at the gain. For the cost, look at is the original cost of the house (the price on the bill of sale, plus any commissions paid) and then assess your share.
One half of the gain or loss is the taxable gain or allowable loss.

The mortgage is a separate transaction that would not have any tax implications.

Crystal April 3, 2012 at 9:57 pm

The company that I work for allows us to purchase stock at a 15% discount of the market value twice a year. Which price do I use to calculate the capital gain – the discounted price or the fair market value at the time of purchase?

Dean Paley (Tax Guy) April 3, 2012 at 11:32 pm

Crystal,
Your cost is what you actually paid for it and the proceeds of the sale is what you received. The difference is a gain or loss.

The cost is the FMV less the 15%.

evangelos October 24, 2012 at 10:59 pm

I have a rental property in montreal, and live in canada….I am trying to determine if I have to pay capital gain on a cash-out refinancing ? If I do what would be the capital gain for this example; House costs $500K, I put a deposit of $100K, and get a 5yr mortgage for $400K. After 5yrs, I owe $300K, but the house is worth $600K, and I plan on taking out a new mortgage of $480K and keep some of cash.
So would the capital gain be
1. $480K (new mortg) – $300K (still owe) – $100K (what I put in) = $80K x 1/2 or
2. $600K (what is now worth) – $300K – $100K = $200 x 1/2

Tax Guy - Burlington Accountant October 25, 2012 at 7:24 am

The tax event is triggered when there is a change in ownership of the property.

In your case, you are borrowing against the value and no tax applies.

Harry December 20, 2012 at 3:16 am

Hi, I have a question about triggering a capital gain. I would like to “book” some capital gain on a stock this year rather than in the future, because my income was very low. However I like the stock. Do I have to sell it and wait 30 days before buying it again for the gain to be “valid”?

Tax Guy - Burlington Accountant December 20, 2012 at 2:47 pm

Harry,
There are no superficial gain rules! You can sell it to realize the gain and buy it back at the higher cost.

Harry December 21, 2012 at 4:40 am

Thank you very much!

mary January 4, 2013 at 8:08 am

I have a capital gains question. I purchased a house for the first time in my life several years ago which I own and have always paid 100% of the mortgage, property tax, etc. My mother’s name is on the title of the deed and mortgage but she has never had any intention of owning my house. She has never lived with me nor has she ever made any financial investment into the house. She lives with my dad so her principle residence is with their matrimonial home. If by mutual agreement, her name is removed off the title of my house and mortgage, and the house is not being sold, rather it will be refinanced with just my name on the mortgage, will she experience a capital gain?

Tax Guy - Burlington Accountant January 5, 2013 at 5:27 pm

Hi Mary,
More of a legal question, but I would argue that your mom is on the title for convenience only and that there would be no income tax consequences for either of you.

Luke January 26, 2013 at 11:37 pm

Hello, in the United States I have read that if you own an investment property you can sell your property at a profit and roll your money over into another property within 60 days without having to pay capital gains taxes at all – a transaction known as a Section 1031 exchange. Is there a law similar to this in Canada?

Tax Guy - Burlington Accountant January 27, 2013 at 10:03 am

Luke,
There is no such deferral for rental properties in Canada. The only option available is the capital gains deferral where the seller self-finances the sale over a period of five years and a part of the gain may be deferred for up to five years (i.e. a portion is recognized each of the five years).

Bruce March 23, 2013 at 10:57 am

Is the purchase price of a house used for capital gains or the tax assesment at the time of purchase. Lets say for example John buys a house from his Brother frank for 50k more then it’s worth. Frank gifts the 50k back to John as it was his principle residents he didn’t pay tax on the ammount. When John sells the house down the road he will have 50k protected from gains. Does it work like this? Would any laws be broken?

Tax Guy - Burlington Accountant March 25, 2013 at 9:17 am

The purchase price is always used for determining cost for the purchaser. If the property is transferred between people not dealing at arms-lenght, then the transfer will be deemed to be at fair market value if the transfer is below market value. Gifting back, is a deemed dispostion at fair market value.

Donna September 23, 2013 at 12:26 pm

“If you dispose of the shares of a qualified small business corporation or qualified farm property you can shield $750,000 of the gain from tax!”

Does this also apply the situation where a farm corporation redeems the shares of one of the shareholders? Or would CRA consider that a deemed dividend?

Would this apply if one of the farm shareholders sold their shares to a relative (Sibling or Uncle) who was already a shareholder?

I’m trying to figure out which of the scenarios you mention in
http://blog.taxresource.ca/sell-or-redeem-shares-in-a-ccpc/

apply to disposal of shares of a farm corporation.

Tax Guy - Burlington Accountant October 22, 2013 at 5:36 pm

There is a capital gains exemption on shares from a family farm corporation and the rules are pretty much similar to those in the article.

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