2- Capital gain or loss

A capital gain or loss is generally the difference between the proceeds of sale, net of expenses, and the cost of the property.

Since June 25, 2024, individuals must include the taxable capital gain amount in their income as follows: half (50%) of the first portion of $250,000 as a capital gain realized in the year and two thirds (66.67%) of capital gains in excess of this threshold.

The threshold of $250,000 applies annually in addition to the capital gains deduction (see point 3 of this section). This overall ceiling applies to capital gains and employee stock options.² This annual threshold cannot be carried over or shared.

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. A previous year’s net capital loss is deductible against the current year’s taxable capital gains by adjusting the value of the capital loss to reflect the inclusion rate for taxable capital gains for the year in which the deduction was claimed.

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 reasonable³ 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.

An individual who claims a capital gains reserve for 2023 must include in their 2024 income an amount corresponding to 50% of the amount claimed as a reserve in the previous year. Any reserve claimed as of 2024 shall be included in the subsequent year based on the inclusion rate in effect for that subsequent year, regardless of when the capital gain was realized. Therefore, the capital gain reversed in the subsequent year shall be included in income based on a basic inclusion rate of two-thirds reduced from 50% where the capital gains are under the annual $250,000 threshold for individuals.

Example: In 2024, Mr. Smith will have to report a capital gain of $60,000 from his capital gains reserve claimed in 2023 and will have to include $30,000 in his income ($60,000 × 50%). In 2024, since he did not receive all of the proceeds of disposition, he may deduct $40,000 as a capital gains reserve, either the lesser of 60% of the capital gain realized in 2023 ($48,000) and a reasonable amount ($80,000 × $60,000 / $120,000 = $40,000). In 2025, he will have to report a capital gain of $40,000 representing the reserve claimed in 2024. Assuming that Mr. Smith does not have other capital gains in 2025 and since this gain is below the threshold of $250,000, the capital gain will be included in income at a 50% inclusion rate for a taxable capital gain of $20,000.

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 (see Section VI).

Share Exchange

Under certain circumstances, 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 resale of real property (flip)

Profit from the disposition of a residential property or a contract for the purchase and sale of such property, including a rental property and a principal residence (see Section II), 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 the applicable capital gains inclusion rates. However, it is not possible to realize a loss other than a capital loss under this rule.⁴

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,⁵ 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 When, during a year, the total capital gains and benefits relating to stock options exceeds $250,000, the individual must choose how he/she wishes to allocate the preferential treatment (see an example in Section V).

³ The CRA generally uses the following formula to calculate a reasonable reserve:
Capital gain × Balance of proceeds of disposition/Proceeds of disposition

⁴ For further information, visit the Residential Property Flipping Rule page on the CRA website.

⁵ The move should allow the taxpayer to be at least 40 kilometres closer to his new place of work.