For many people, the primary goal of investing is to sell their investments for a profit or gain. However, it’s important to understand how these gains are taxed. Capital gains taxes are complicated, and each financial situation is unique. Make sure you talk to a financial professional about your situation.
What Are Capital Gains Taxes?
Capital gains taxes are taxes you have to pay on any increase in the value of an investment, such as a stock or real estate. If the value of your investment increases, you need to pay taxes on that capital gain.
One important distinction is between realized and unrealized gains. Realized capital gains occur when you sell an investment for more than you paid when you purchased it. For example, maybe you bought a property for $100,000 and sold it for $200,000, and you would have $100,000 of realized capital gain.
Unrealized capital gains occur when the investment still increases in value, but you don’t actually sell it. You may have the same capital gains as in the scenario above, but if you don’t sell the property, you have unrealized capital gains.
You only pay capital gains tax on realized capital gains.
A Note About Capital Gains and Registered Plans
If you are investing in a registered plan, such as a Registered Retirement Savings Plan (RRSP), a Registered Retirement Plan (RRP), or a Registered Education Savings Plan (RESP), you won’t have to face the same capital gains taxes as you might with other investments. This is because these investments are tax-sheltered, meaning that you don’t have to worry about any changes in their value until you withdraw the funds; each plan has its own withdrawal requirements.
Capital Gains Taxes in Canada
When looking at capital gains taxes in Canada, the most popular question is, “How much is the capital gain tax?” According to the Canadian government, 50% of all capital gains are taxable.1
In the above example, if you bought the property for $100,000 and you sold it for $200,000, that is a net capital gain of $100,000. But you only have to pay capital gains taxes on half of that amount, or $50,000.
After you know how much capital gain to report to the CRA, you then report that amount and tack it on to your taxable income. Taxable income includes funds from employment and self-employment, pensions, savings plans, investments, and other benefits.2 Capital gains fall into the “investment” category.
The amount of taxes you will pay on your capital gains will depend on your tax bracket. Here are the federal tax rates for 2022, according to the CRA:3
- 15% on the first $50,197 of taxable income, plus
- 20.5% on the next $50,195 of taxable income (on the portion of taxable income over $50,197, up to $100,392), plus
- 26% on the next $55,233 of taxable income (on the portion of taxable income over $100,392 up to $155,625), plus
- 29% on the next $66,083 of taxable income (on the portion of taxable income over $155,625 up to $221,708), plus
- 33% of taxable income over $221,708
So, if you didn’t make any other taxable income in the same year that you sold the property, you would pay a 15% tax on your $50,000 capital gain.
All this tax talk might seem disheartening; you want to keep more money in your pocket. However, the silver lining is that your investments are appreciating. You could be in a capital loss position, and while you might not owe as much in taxes, that also means that your investments aren’t performing as well. There are many strategies you can implement to minimize your capital gains taxes. Meet with your CPA or accountant to learn more about these tax minimization strategies.
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