Helping your clients manage taxes is a big part of your work as a financial advisor. One area that often raises questions is capital gains tax. Being knowledgeable about this tax can help you guide your clients, especially if they’re selling investments, real estate, and other valuable assets.
In this article, Wealth Professional Canada will discuss the essentials of capital gains tax, how to calculate it, and practical ways to help your clients reduce what they owe.
Capital gains tax is the tax your clients pay on the profit from selling a capital asset. Capital assets include properties such as real estate, as well as investments like:
Capital gains tax also applies when you sell fixed income instruments, such as bonds, for more than you paid.
Canada’s capital gains tax applies to a wide range of assets, but there are exceptions. One example is the principal residence exemption. If your clients sell their primary home, any profit from the sale is not subject to capital gains tax, as long as certain conditions are met. We’ll discuss this further below.
Registered investment accounts also provide tax-sheltered growth. This means that gains inside these accounts are not taxed while the funds remain within the account. These accounts include:
The capital gains tax is not a separate tax rate. Instead, it is based on your clients’ income tax bracket. An inclusion rate is then set by the government. This is the portion of the capital gain that is added to taxable income.
Currently, the inclusion rate is 50 percent for most individuals. This means that if your client realizes a $10,000 capital gain, only $5,000 is included as taxable income. The actual tax paid depends on their marginal tax rate.
There are some recent and upcoming changes to be aware of. The inclusion rate will increase to two-thirds or about 67 percent for gains above the $250,000 threshold. This is for individuals who realize more than $250,000 in capital gains in a year, as well as for all corporations (and some trusts).
This change is scheduled to take effect on January 1, 2026, after being deferred from an earlier date. If your clients are affected by these rules, it is a good idea to review their plans and consult a tax professional if needed.
Check out this video on the latest capital gains tax rules below:
When your clients sell an asset for more than they paid for it, the difference is called a capital gain. If they bought shares for $1,000 and sold them for $1,500, the capital gain is $500, after accounting for any expenses related to the purchase or sale.
Capital gains are only taxed when they are realized. This means that the asset has actually been sold. If the value of an asset increases but your clients do not sell it, the gain is unrealized and not subject to tax.
Calculating capital gains for your clients involves a few steps, which we’ve summarized into three main points. The goal is to determine the profit from the sale of a capital asset, after accounting for all relevant costs:
The proceeds of disposition are the amount your clients receive from selling an asset. This is the sale price, minus any costs directly related to the sale.
The ACB is the original purchase price of the asset, plus any additional costs incurred to acquire it. For investments, this includes commissions and fees. For real estate, it can include legal fees and closing costs.
If your clients have made multiple purchases of the same asset at different prices, the ACB is the weighted average cost of all purchases.
Consider any outlays and expenses related to selling the asset. These can include renovation costs for real estate as well as transfer taxes and legal fees. Commissions paid to sell the asset can also be included. These costs are added to the ACB to reduce the taxable gain.
Here's the formula for calculating capital gains:
You can also use our capital gains calculator below:
There are several strategies you can use to help your clients reduce or defer capital gains tax. These strategies can make a difference in their lowering total tax liability:
Registered accounts can allow your clients to grow investments tax-free while the funds remain in the account. Gains, dividends, and interest earned inside these accounts are not taxed until withdrawal (for RRSPs and RESPs), or not at all (for TFSAs). Encourage your clients to maximize contributions to these accounts to shelter investment growth from capital gains tax.
If your clients have realized capital losses, these can be used to offset capital gains in the same year, reducing the taxable amount. If losses exceed gains, the excess can be carried back up to three years or carried forward indefinitely. This is especially useful in years when your clients have large gains and want to reduce their tax bill.
The sale of a principal residence is exempt from capital gains tax in Canada. To claim this exemption, your clients must:
Only one property can be designated as a principal residence per family per year. Vacation homes and investment properties do not qualify for this exemption.
Tax shelters are legal ways to defer or reduce taxes on investment gains. As long as investments remain inside a registered account, your clients can buy and sell without triggering capital gains tax.
Timing the sale of assets can also help. If your clients expect to be in a lower tax bracket in the future, they might benefit from deferring the sale of assets until then.
Donating appreciated assets such as stocks to a registered charity can provide a tax benefit. Your clients receive a tax receipt for the fair market value of the asset, and the donation does not trigger a capital gain.
This strategy allows your clients to support the causes that they care about while reducing their tax bill. It is important to consult with a tax professional or the charity to make sure that the donation is handled correctly.
Tax-loss harvesting involves selling investments that have declined in value to realize a capital loss, which can then be used to offset gains. Some investment platforms offer tools to help with this process.
However, the CRA has rules against superficial losses. If your clients sell an asset at a loss and buy it back within 30 days, the loss might be disallowed. The same rule applies if they buy a similar asset that tracks the same index.
It is important to avoid triggering a superficial loss, as this can lead to additional scrutiny or an audit.
If your clients co-own an asset with a partner, such as a secondary property, the capital gain can be split between them. This can help keep each individual’s share of the gain below the $250,000 threshold, maintaining the lower inclusion rate of 50 percent.
If only one person owns the asset and the gain exceeds $250,000, the higher inclusion rate of 67 percent will apply to the excess.
When your clients pass away, their investments and properties might be subject to capital gains tax. Having a will in place can help ensure a smooth transfer of assets to heirs and minimize the impact of capital gains tax on the estate.
Capital gains tax is an important consideration for your clients. It applies to the profit from selling capital assets, with some important exemptions for principal residences and registered accounts. The inclusion rate determines how much of the gain is taxable. Recent changes will affect your clients with large gains or those who own assets through corporations or trusts.
As such, encourage them to keep good records and review their investment accounts. You can also advise your clients to consult a tax professional for complex situations. With this, they’ll be able to manage capital gains tax effectively and keep more of their hard-earned wealth.
To read more about capital gain tax and other related topics, check out our dedicated page for fixed income.
