Capital Gains

What are they and how are they taxed?

A capital gain is different than other income in that only half is taxable (the other half is not taxed). It arises when capital property is sold.

What is Capital Property?

For most individuals, capital property would include your investment property or rental unit, or stocks and mutual funds held outside of a registered account (such as RRSP).

Property is not considered capital in nature if it is part of your normal course of business. For example, if you buy and sell property for speculative purposes (ie. "flip" properties), then any gain on the sale may be fully taxed. Similarly, if you perform day-trading of stocks and this can be considered your “business,” then your gains may also be fully taxable.

How does Taxation of Capital Property Work?

Capital property is taxed at 50%. That is not the rate of taxation. Rather, the tax rate applied is your marginal income tax rate. The federal tax rates are approximately:

Income Rate

Up to $45,000 15.0%

$45,001 - $90,500 20.5%

$90,501 - $140,300 26.0%

$140,300 - $200,000 29.0%

$200,000 and up 33.0%

Now an example:

You earned $45,000 in 2017. Assuming no deductions, your taxable income is $45,000 at a tax rate of 15%. You are in the lowest tax bracket.

During the year, you sold your investment property for $600,000. You had purchased this property a number of years ago for $500,000 and did not live in it.

Your capital gain on the sale of the property is $100,000 ($600,000 - $500,000). Your taxable capital gain is $50,000 ($100,000 x 50%) because half is not taxable.

Your new taxable income is now $95,000 ($45,000 + $50,000). You are now in the third tax bracket of 26%; however, you do not pay 26% on all of your income. The breakdown would be like this:

Income Rate

Up to $45,000 15.0%

$45,001 - $90,500 20.5%

$90,501 - $95,000 26.0%

This illustrates that only $4,500 of your total income will be taxed at 26%.

Note: for our purposes, this shows the approximate federal taxes only. In actuality, each province also applies its own tax rates.

What Happens if I Sell Capital Property at a Loss?

When capital property is sold for a loss, only half is "taxable" and these are called allowable capital losses. These losses can be applied against taxable capital gains (being the taxable 50% of any capital gain) in the current year, in any of the preceding three years, or carried forward indefinitely to be applied against future taxable capital gains.

Selling your Principal Residence

There is a special exemption when you sell your principal residence, where the capital gains are tax-free. Please read our post about the selling your principal residence here.

As always, please consult your tax professional for a detailed analysis of your specific situation, and contact OMNI if you have any questions or comments!