Investing, Investing Basics

Demystifying Capital Gains in Canada: Everything You Need to Know

by Modern Money

What are Capital Gains?

In simple terms, capital gains are the profits you earn when selling an investment, like stocks, for a higher price than purchased.

This article breaks down Canadian capital gains taxation, offers a non-registered account stock selling example, and discusses tax-protected accounts.

Tax Implications of Capital Gains in Canada

In Canada, capital gains are subject to taxation, but only 50% of the gain is taxable. The “inclusion rate” describes this process. Your marginal tax rate applies to the taxable portion of the capital gain, adding it to your income for the year and subjecting it to taxation accordingly. The remaining 50% of the gain is tax-free.

For example, let’s say you purchased a stock for $5,000 and later sold it for $10,000, realizing a capital gain of $5,000. Only 50% of this gain, or $2,500, would be subject to tax. If your marginal tax rate is 30%, you would owe $750 ($2,500 x 30%) in taxes on this capital gain.

Selling Stocks in a Non-Registered Investment Account

A non-registered account is an investment account that does not offer any tax advantages. When you sell a stock in a non-registered account, you must report any capital gains or losses on your income tax return.

Suppose you bought 100 shares of a company’s stock at $50 per share in a non-registered account, totaling $5,000. After a few years, you decide to sell the shares at $100 each, resulting in a total sale value of $10,000. In this case, you would have a capital gain of $5,000 ($10,000 – $5,000). As mentioned earlier, only 50% of this gain would be taxable, meaning you would need to include $2,500 in your taxable income for that year.

How Can I Reduce my Capital Gains Tax Burden?

Simple – by investing in tax protected accounts! In Canada, there are tax-protected accounts such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) that offer various tax advantages.

Financial experts specifically design RRSPs for long-term retirement savings. Contributions made to an RRSP are tax-deductible, reducing your taxable income for the year. However, when you withdraw funds from your RRSP, the tax authorities treat the withdrawals as taxable income. Capital gains within an RRSP are tax-exempt, but withdrawals are taxed based on your marginal tax rate.

TFSAs, on the other hand, are more flexible investment accounts that allow you to save for various purposes. Contributing to a TFSA uses after-tax dollars, so you don’t receive a tax deduction for your contributions. The advantage of a TFSA is that any investment growth, including capital gains, is tax-free. Additionally, withdrawals from a TFSA are tax-free and do not affect your income-tested benefits or tax credits.

Click here for the Modern Money Research Team’s comprehensive article portfolio on personal finance, money management, and money knowledge.

For more on this topic, click here to access the Government of Canada’s complete 2022 breakdown of capital gains.

cropped MM Logo No Background.png
About Modern Money

This article is brought to you by the Modern Money research team. The insights, information and guidance that you need to take control from those who understand you best.

You may also like

The NASDAQ Deciphered: Illuminating the World of High-Tech Stocks

The NASDAQ Stock Market is the second-largest stock market exchange in the world, with more than 3,330 companies listed and it is the world’s second-largest stock exchange by total securities value; its major attraction for listing companies is its significantly lower listing fees, which enable many new high growth and more speculative companies to get listed, while its electronic trading platform allows investors to trade on any major stock-trading platform.

Which Investment Platform is Right for Me? Wealthsimple or Interactive Brokers?

In our last article, we compared two of Canada’s leading low-cost investment platforms: Wealthsimple Trade and Questrade. In this article, we are going to consider another low-cost option that is lesser known north of the border: Interactive Brokers Canada.

Subscribe to Modern Money

Enter your e-mail to receive updates on new articles from Modern Money, the ultimate guide for young professionals.

Don't worry, we won't send you any spam.
Share via
Copy link
Powered by Social Snap