What are capital gains?
You have a capital gain when you sell an asset or investment for more than it cost you to acquire it. If you purchased $100 worth of stock and then sold those shares for $150 two years later, for example, you would have a capital gain of $50. On the other hand, when you sell an asset for less than its original purchase price, that’s called a capital loss.
Capital gains and losses can occur with many types of investments and property, including stocks, bonds, shares in mutual funds and exchange-traded funds (ETFs), rental properties, cottages and business assets. Capital gains generally do not apply to some types of personal-use property, such as cars and boats, whose value tends to decrease over time. They also don’t apply to the property you live in—your principal residence.
Capital gains are taxable in Canada. The value of a capital gain is treated as income earned during the tax year in which it was realized. There are, however, important exceptions to these rules, which we’ll run through below.
Watch: Capital gains tax, explained
What is the capital gains tax rate in Canada?
Many Canadians mistakenly believe that the entire capital gain is taxed at a rate of 50%. In fact, only 50% of a capital gain is taxable, and the rate depends on where you fall within the federal and provincial income tax brackets in the year you report the gain. The gain is added to your taxable income. There’s no single “capital gains tax rate” in Canada, because the rate depends on how much you earn. The higher your total income (including employment) is for the year, the more tax you can expect to owe on a capital gain.
Also important to know: A capital gain is taxed only once it is “realized,” meaning the asset has been sold. As long as the gain is “unrealized,” meaning the asset’s value has increased on paper but the asset remains in your possession, you do not have to pay taxes on it.
Let’s say you realize a capital gain of $50,000 this year. Half of that amount ($25,000) must be reported as income on your tax return when you file next year. If you fall in a 33% marginal tax bracket—the highest federal tax rate in 2023—the additional $25,000 in income results in $8,250 in taxes owing. The remaining $41,750 is yours to keep. And if you fall within a 26% marginal tax bracket, the same capital gain results in $6,500 in taxes owing—meaning you keep $43,500.
With the tax rates we currently have in Canada, and the fact that only half of a capital gain must be reported as income, no one is paying more than 27% in capital gains tax. Most people pay much less.
How to calculate capital gains and losses
You can calculate whether you have a capital gain or loss by subtracting the asset’s net cost of acquisition from the net proceeds of its sale.
As simple as that may sound, there’s a bit more to it. To ensure you follow capital gains tax rules as set out by the Canada Revenue Agency (CRA), you’ll need to know the adjusted cost base (ACB), outlays and expenses, and proceeds of disposition.
Interestingly, if he makes this election in the future, he can elect to treat the condo as his principal residence for up to four years before he moved into it, which may wipe out all but one year of taxation divided by the total years you all own the property.
Does an owner pay capital gains tax for moving into a rental property?
It depends on the steps taken. Liljana, I think your son can make a 45(3) election in the future. Although you and your husband could as well, it may lead to more tax later on your home. You might need to pay some capital gains tax now on the condo’s change in use to personal use. You might also need to pay more tax later on the subsequent appreciation as well from the time your son moved into it to the time you transfer it to him or sell it, or upon the second death of you and your husband. This appreciation will also be taxable, assuming you want to preserve your principal residence exemption for your house.
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You can claim a property that your child lives in as your principal residence if it is legally or beneficially yours. But this has tax implications for your own home.
Ask MoneySense
I bought a condo in 2006 in another province for my daughter to live in. It’s registered in my name. I also have a house in another province. I am planning to sell the condo my daughter lives in very soon. Can I claim capital gain exemption in the condo she lived in all these years?
—Bill
Capital gains tax when selling a home your child lives in
Canadian taxpayers may be eligible to claim the principal residence exemption when they sell real estate. Since 2016, real estate transactions have been under more scrutiny with the Canada Revenue Agency (CRA) since taxpayers now need to report all sales on their tax returns, even if the sale is of a tax-free principal residence.
The definition of principal residence for tax purposes
According to the CRA, in order for a property to qualify as a principal residence, it must be:
- A housing unit, which can include a house, a condo, a cottage, a mobile home, a trailer, a houseboat, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation;
- Owned by the taxpayer, jointly or otherwise, legally or beneficially;
- Ordinarily inhabited in the year by the taxpayer, their spouse or common-law partner, their former spouse or former common-law partner, or child.
There can be nuances in the principal residence guidelines that may impact your ability to qualify for the exemption. Some examples are if your home was rented out or used for business purposes, if the acreage is significant, or if you owned another property during the same years that you owned the property in question and claimed the principal residence exemption for it.
Legal versus beneficial ownership of a property
An important nuance for you, Bill, is whether your daughter beneficially owned the property. If she did—meaning you were on title, but it was technically hers—she may be able to claim the principal residence exemption herself. This could be the case if she paid all of the ongoing expenses, amongst other criteria. But then the question may be where did the down payment come from, and if the property was in fact beneficially your daughter’s, but legally in your name, why did the two of you not put it in her name in the first place?