How to Reduce Capital Gains Tax in Canada

If you had capital gains during a tax year in which you were deemed a resident of Canada, you are probably subject to Canadian capital gains tax. Nevertheless, deductions are available under Canadian tax law up to a certain lifetime limitation. In particular, income derived from the disposition of certain capital property may be deductible. Furthermore, under certain conditions capital losses can not only be set off against capital gains, but can be carried forward to future years. A basic understanding of these loopholes will help navigate the Canadian tax maze to avoid overpayment.

Difficulty: Moderate

Instructions

1. Determine whether you qualify for a capital gains deduction based under Canadian residence requirements. Only taxpayers deemed to be residents of Canada during the tax year in question are eligible for the capital gains deduction. If you were in Canada for 183 days or more, or rent or lease a home in Canada, you will probably be considered a full-year resident of Canada. Additionally, you will be probably considered a Canadian resident if you were a resident of Canada for at least part of the tax year in question and were a full-year resident of Canada during the previous and following tax years.

2. Determine your maximum allowable capital gains deduction. Canada enforces a $750,000 lifetime capital gains exemption (LCGE). Within this limit, the maximum lifetime capital gains deduction for the sale of certain properties is $375,000.

3. Download Form T657, Calculation of Capital Gains Deduction, from the website of the Canada Revenue Agency (CRA). If you had investment income or expenses for any of the 10 years prior to and including the tax year in question, you will also need to download Form T936, Calculation of Cumulative Net Investment Loss (CNIL).

4. Claim deductions on Form T657 (within the lifetime limits described in Step 2 above) of any capital gains from dispositions of qualified small business company stock or dispositions of qualified farming or fishing property, and/or reserves brought into your income in 2008 from any of these categories. You must have been a resident of Canada at the time of the disposition in order to be eligible to claim a capital gains deduction.

5. If you have income from a capital asset that is going to be distributed to you over a period of several years, then claim a reserve. In this case, only the income received in the current year will be counted as taxable capital gains for the year.

6. Determine if you had capital losses during the tax year in question. If you did, then subtract the amount of these losses from your capital gains during the same year, resulting in a deduction from your taxable capital gains. Furthermore, if the balance is negative, then you probably had a net capital loss for the tax year in question. These capital losses can be carried forward and deducted from taxable capital gains in future years. Record this information on Form T936.

Tips & Warnings

• If you pay taxes in another country as well (the United States, for example), check the relevant tax treaty in order to avoid double taxation.
• Be careful about determining your Canadian residency status for the purpose of claiming capital gains deductions. There is no "bright line" rule on who is and is not a resident--it is a factual determination made by the CRA. In borderline cases, the CRA might disagree with you and you could end up with an unexpected tax bill. Be sure to retain records of your residency status, such as lease agreements and evidence of spouse and/or dependents living in Canada.

Resources

• Form T657 Calculation of Capital Gains Deduction
• Form T936 Calculation of Cumulative Net Investment Losee

Who Can Help Sponsored