Canada taxes both income and capital gains, but the two are taxed differently. Capital gains and capital losses result from the disposition of capital property. We typically think of a disposition as a sale of the property; however, other events are also classified as dispositions, such as a deemed sale, a gift, theft of property, or expropriation by the government.
The difference between capital property, inventory, and personal property is not covered on this page. As a general guide, capital property refers to assets that are held as an investment to generate income, such as stocks, rental properties, or bonds.
For several policy reasons, taxable capital gains are only half of the actual capital gain. This means that only half of the gain is taxed, and the other half is received tax-free. This is a significant tax advantage. If, for example, you bought stock for $1,000 and sold it for $10,000, the gain on the sale is $9,0000. Of the $9,000 gain, only half, or $4,500, is taxable.
Understanding Capital Gains and Losses in Canada
Most Canadians receive information about their capital gains and losses through annual tax slips, such as the T3, T5, T5013, and T4PS. In some cases, your investment account history will include details about the purchase and sale of securities that must be reported if they are considered capital property.
New Reporting Requirement for Principal Residences
Beginning with the 2016 tax year, the rules for reporting the sale of a principal residence changed. Previously, if you claimed the principal residence exemption, you did not have to report the sale. However, starting in 2016, even though the gain from selling your principal residence remains tax-free under the exemption, the sale must be reported to the Canada Revenue Agency (CRA).
When and Where to Report Capital Gains
Capital gains or losses from the disposition of capital property must be reported in the year the property was disposed. This reporting is done through your tax return and is due on the same date as the return itself. Specifically, you must complete Schedule 3 of your T1 return to calculate and report your capital gains or losses.
Using Guide T4037 When Reporting Capital Gains
Guide T4037, Capital Gains, is a helpful resource for taxpayers who have disposed of capital property during the tax year. While not 100% comprehensive, it helps explain how to properly calculate and report capital gains and losses in various situations.
Who Should Use Guide T4037
Taxpayers who sold real estate, shares, mutual funds, or other capital property should consult Guide T4037. The guide is also useful for those involved in deemed dispositions, such as when property is gifted, or when a change in use occurs (for example, converting a principal residence into a rental property).
Both residents and non-residents of Canada who have disposed of taxable Canadian property may benefit from its guidance. Individuals claiming the principal residence exemption, or applying capital loss carryforwards, will also find relevant instructions and clarifications.
Recent Changes for the Tax Year
Each year, Guide T4037 is updated to reflect legislative and administrative changes from the Canada Revenue Agency. Examples of recent updates include:
- Revised thresholds or tax treatment for certain dispositions
- New guidance on digital asset (e.g. cryptocurrency) reporting
- Enhanced reporting requirements for principal residence sales, including updates to Form T2091
- Adjustments to inclusion rates for specific property types or special situations
Always confirm that you are using the latest edition of the guide to ensure your reporting aligns with current tax law.
T4037’s Practical Charts and Examples
The guide contains several charts that outline the capital gains inclusion rate, allowable expenses, and categories of capital property. These tools simplify the calculation process, helping users determine the adjusted cost base (ACB), proceeds of disposition, and outlays or expenses incurred to sell the asset.
To illustrate more complex scenarios, Guide T4037 provides practical examples. These include:
- Sale of shares acquired through employee stock option plans
- Disposition of rental properties partially used as a principal residence
- Capital gains splitting between spouses in joint ownership situations
These examples help clarify how rules apply across different cases, making the guide more accessible for those who may not be familiar with the technical language of tax legislation.
How the Guide Supports Accurate Reporting
Schedule 3 of the T1 return is where capital gains and losses are reported. Guide T4037 provides a line-by-line breakdown of how to complete this schedule, as well as how to transfer relevant information to other forms, such as:
- T1A (Request for Loss Carryback)
- T657 (Calculation of Capital Gains Deduction)
- T2091 (Designation of a Property as a Principal Residence)
Because it is a document, Guide T4037 can’t cover every scenario, may be ambiguous at times, and can’t answer questions or provide advice. It’s always best to talk to a professional if you’re even slightly unsure of your reporting obligations, and to get expert tax-planning strategies.
How to Calculate a Capital Gain or Loss
There are two main components involved in calculating a capital gain or loss:
1. Adjusted Cost Base (ACB)
The Adjusted Cost Base is the amount you originally paid for the property, plus any associated costs. These can include legal fees, brokerage commissions, and other expenses directly related to acquiring the property.
2. Proceeds of Disposition
This is the amount you received from selling the property (or its fair market value at the time of disposition), minus any costs related to the sale (such as commission or legal fees). However, this amount isn’t always what you actually received.
Important Note:
If you gave the property as a gift or sold it to a non-arm’s-length individual (such as a family member) for less than its fair market value, you must still report the fair market value as the proceeds of disposition. For example, if you gift property to your child, the CRA considers the fair market value of that property as the proceeds, even if no money was exchanged.
Final Calculation
To calculate the capital gain or loss:
Proceeds of Disposition – Adjusted Cost Base = Capital Gain or Loss
- A positive result indicates a capital gain
- A negative result indicates a capital loss
Only 50% of the capital gain is taxable. Similarly, 50% of a capital loss is considered the allowable capital loss.
Capital losses can be carried back three years or carried forward indefinitely to offset capital gains in other years.
Key Exemptions from Capital Gains Tax
There are some notable exceptions where capital gains are either reduced or not taxable:
- Lifetime Capital Gains Exemption: Applies to gains from the sale of qualifying private company shares or certain farm or fishing properties.
- Donations to Charity: If you donate eligible property such as publicly traded shares, mutual fund units, ecologically sensitive land, or interests in segregated funds to a qualified charity, the gain is not taxable.
Why Professional Advice Matters
This page offers general information about reporting capital gains and losses. However, the rules governing whether a property is considered capital property and how gains and losses are treated can be complex.
If your situation involves anything beyond a straightforward transaction, it’s wise to consult a tax professional. Proper reporting ensures you remain compliant and protects your financial future by helping you avoid penalties and interest.
If you believe you may have incorrectly reported gains in previous years, you might be eligible to correct the issue through the CRA’s Voluntary Disclosures Program. Reach out to us to find out if you qualify.
As experienced and licensed CPA tax consultants, we help our clients handle all tax and accounting issues. Give us a call today at 1 844 340 5771 to schedule an assessment.
