Capital gains are defined as any profit or income you received from selling property or an investment. Capital gains are often taxed at a separate rate from income received from working and are often eligible for different deductions and rules that could help you reduce your capital gains tax requirements in Canada.
While it is always advised to consult with a tax professional for specifics pertaining to your particular taxes, there are certain general guidelines that you can follow if you want to get a capital gains tax deduction.
Figure Out Tax Status and Maximum Deduction
Only Canadian residents can qualify for capital gains taxes. Residents of Canada are defined as anyone living in Canada for at least 183 days out of the year. If you rent or lease a home in Canada, even if you live outside of the country, you may also be considered a full-year resident. You may potentially be eligible for capital gains tax deduction if you were a Canada resident for part of the tax year and a full-year resident during some previous tax years.
If you are eligible for a deduction, determine the maximum deduction you are able to take. Canada has a lifetime limit on capital gains exemptions of $750,000, so if you’ve taken capital gains tax deductions in previous years, you may not be able to take as much as you like. For certain properties within this limit, the lifetime limit is $375,000.
File Forms T657 And T936
Form T657 can be found on the website of the Canada Revenue Agency. You may also be able to find it at your local accountant’s office. If you are calculating investment expenses and income for up to 10 years before the current tax year, you may also need to find Form T936 to calculate cumulative net investment gains and losses.
Deductions will be included on Form T657. They include deductions on capital gains from:
- Qualified small business company stock
- Qualified fishing or farming properties
- Certain business capital and properties
- Reserves from any of these categories
A reserve should be claimed when you have income from a capital asset such as a trust fund distributed over a period of multiple years. This process involves only reporting income received in the current year to be counted toward capital gains for the year.
Capital losses may be reported on Form T936 and held against any future capital gains for taxation purposes. Consult with an account for assistance with Form T936, but know that your losses are just as important to reducing your capital gains tax as your deductions.