How it works: Capital gains tax on the sale of a property

How are capital gains calculated? How are they taxed?

Before we dive into the tax part, let’s go through how to calculate capital gains on the sale of a property. Essentially, this calculation figures out how much the property’s value grew from when you first bought it to the day you sold it. This above is a simple-math calculation of the capital gain.

Capital gain = purchase price – selling price 

We will dive even deeper to reduce the amount of capital gains you would claim on your tax return (more on that below).

So, it’s not that capital gains are taxed at a rate of 50%, but it’s that 50% of the capital gains are taxable. And the capital gains tax rate depends on the amount of your income. You add the capital gain to your income for the year, including money you receive from your job, side hustles, dividends in non-registered accounts, any selling of assets and so on. 

Capital gains are taxed as part of your income on your personal tax return. Below are the federal tax brackets for 202, which can give you an idea of how much tax you may owe for the year. You will need to figure out the provincial tax bracket rate for your province or territory, too. Since Canada has a tiered tax system, you will have to do a bit of math to estimate your annual income tax, breaking down your total tax into the brackets, and the amount owed for each bracket. 

The first column is the tax rate, meaning the percentage of the income that is considered taxable (this doesn’t include deductions, of course). The second column is the range of income for that tax rate. Say you earn $60,000 a year, $55,867 would be within the 15% tax rate and $4,133 is in the 20.5% rate ($60,000 – $55,867). That’s right your income is taxed through the tax brackets, and not on a flat tax rate. This is what’s called “a progressive tax system,” meaning that Canadians with lower incomes are taxed at a lower rate, and tax rates rise incrementally for higher-income earners.

Read on for the provincial and territorial tax brackets.

And, of course, to really get down to the nickel of how much you ultimately owe, you will need to do your tax return and receive a notice of assessment.