Capital Gains Taxes in Canada: A Guide to Their Functioning
In Canada, understanding the intricacies of capital gains tax is crucial for high-net-worth individuals and investors. The tax rules surrounding capital gains can be complex, and it's essential to stay informed to minimise tax liabilities.
Capital gains are taxable in Canada, and the gain is calculated by subtracting the adjusted cost base (ACB) of an asset from its sale price. The ACB includes the original purchase price, plus any fees or expenses related to the acquisition. Losses in investments can be used to offset gains, and net capital losses can be carried forward or back a few years to reduce your tax bill.
One of the significant exemptions from capital gains tax in Canada is the Lifetime Capital Gains Exemption. This exemption applies to small businesses, farm property, or fishing property, saving taxpayers from paying taxes on all or part of the profit. The increased exemption, now up to C$1.25 million, is only for the sale of small business shares, farming, and fishing properties.
However, tax planning in Canada is mainly composed of temporary reliefs, leaving individuals constantly playing defence. For instance, the principal residence exemption allows for the sale of a main home to be tax-free, but repeated home sales or rentals may lead to the CRA questioning if it's still the principal residence. Estate planning in Canada does not eliminate the tax; on death, most assets are deemed to be sold, triggering gains and tax.
High-net-worth individuals in Canada may find the contribution limits of registered accounts like RRSPs and TFSAs inadequate for their needs. Completely avoiding capital gains tax in Canada is challenging, but legal strategies to minimise it include using tax-sheltered accounts, offsetting gains with losses, and taking advantage of exemptions.
For those seeking professional advice, Nomad Capitalist offers services to help high-net-worth individuals move their business offshore, relocate to tax-friendly countries, or build a personalised plan for global investing. Nomad Capitalist has assisted over 2,000 clients in reducing their tax bills, protecting their assets, and growing their wealth without government interference.
Recently, the government announced plans to increase the inclusion rate for individuals making over C$250,000 in capital gains annually. This proposed increase from 50% to two-thirds has been cancelled as of March 2025. This cancellation is a win, but it's also a warning that the system is becoming unpredictable and may target successful people as cash cows.
Canada's capital gains tax is not separate but is folded into regular taxable income and taxed at the marginal rate. It's essential to consult a local tax expert to navigate these complexities and stay updated on the frequent changes in Canadian tax law.
In conclusion, understanding Canada's capital gains tax rules is crucial for high-net-worth individuals and investors. By utilising strategies like tax-sheltered accounts, offsetting gains with losses, and taking advantage of exemptions, it's possible to minimise tax liabilities. For those seeking more comprehensive advice, services like Nomad Capitalist can provide valuable assistance in navigating the complexities of Canadian tax law.
