A capital gain or loss is generally the difference between the proceeds of sale, net of expenses, and the cost of the property. The taxable capital gain is 50% of the gain and the allowable capital loss is 50% of the loss. Allowable capital losses can only be deducted from taxable capital gains.
If you have generated capital gains during the year, an evaluation of your portfolio prior to year-end may enable you to minimize income taxes by realizing unrealized capital losses, as the case may be.
Any capital loss that is not deducted in one year may be carried over and deducted from taxable capital gains of any of the three preceding years or of any subsequent year.
Reserve
When part of the proceeds of disposition becomes payable after the end of the taxation year, a taxpayer may normally claim a reserve. This reserve must be reasonable1 and limited to a period of five years, i.e., a minimum of 20% of the capital gain must be included in income annually.
Example:In 2023, Mr. Smith sold a property for $120,000 payable over four years at the rate of $30,000 per year. The cost of the property was $40,000. In his 2023 income tax return, Mr. Smith will have to report a capital gain of $80,000. However, he may deduct $60,000 as a capital gains reserve, i.e., the lesser of 80% of the actual capital gain ($64,000) and a reasonable amount ($80,000 × $90,000 / $120,000 = $60,000). In 2024, he will have to pay tax on a capital gain of $60,000 representing the reserve claimed in 2023. However, he will be able to claim a new reserve based on the balance receivable.
In the case of farm or fishing property and small business corporation shares transferred to a child, the five-year reserve period is extended to ten years.
1 The CRA generally uses the following formula to calculate a reasonable reserve:Capital gain × Balance of proceeds of disposition/Proceeds of disposition
Share Exchange
Under certain circ*mstances, a taxpayer may have an opportunity to exchange the shares held in one corporation for those of another corporation. Such an exchange is a disposal and could trigger a capital gain. However, where all conditions are met, the taxpayer can use rollover provisions to defer reporting the capital gain until the disposition of the new shares.
If you hold shares in a corporation that is undergoing a reorganization and that offers a share exchange without immediate tax impact, you may choose to exchange the shares at FMV in order to realize a capital gain from which you could deduct your capital losses.
Foreign Currency Transactions
When a taxpayer reports the disposition of a capital property in a foreign currency, he/she is required to do so in Canadian dollars, using the exchange rate in effect on the date of acquisition for the cost of the property and the exchange rate in effect on the date of disposition for the proceeds of disposition.
Only the amount of an individual’s foreign exchange gain or loss in excess of $200 has to be taken into consideration.
Principal Residence
See Section II.
Quick sale of real property (flip)
Since 2023, profit from the disposition of a residential property or a contract for the purchase and sale of such property, including a rental property, owned by the taxpayer for less than a year is deemed to be income from a business. Accordingly, the gain on the sale is fully taxable instead of at 50%, as is the case for a capital gain.
This presumption will not apply where the sale of the property results from any of the following events: death, addition to the household, separation, personal security (e.g., domestic violence), disability or serious illness, change of employment, job loss, insolvency or involuntary disposition (e.g., expropriation or disaster).
Donations
The capital gain arising from donations of private company shares, real property or certain securities listed on a Canadian stock exchange to a registered charity may be exempt from income tax (see Section II)
2 The move should allow the taxpayer to be at least 40 kilometers closer to his new place of work.
