When you start investing, the first tax tip is to understand the impact of your capital gains or capital loss on your portfolio.

Once a year, during income tax season, you have to look at your investments and calculate your capital gains and losses to report them, if any. It should not be too hard to manage, and I have developed a spreadsheet to help keep track of it.

It’s especially useful if you have multiple purchases over time aggregated against only one sell order, as you need to calculate your ACB.

TIP: You can avoid taxes by leveraging the available tax-free investment accounts.

Tracking Your Capital Gains (or Losses)

As you may expect, your ability to accurately report your gains (or losses) depends on your ability to track all your transactions. Discount brokers provide you with a yearly transaction statement, but they don’t always track multi-year transactions. A T5008 is usually issued for a disposition, but you want to double-check the ACB in Box 20.

That’s all on you. The challenges come with the fact that you may have purchased the shares 20 years ago … Did you keep track of it? What’s your ACB (Average Cost Basis)?

TIP: These days, good online brokers will have a good capital gains report with the T5008 but for tax planning to offset capital gains with capital losses, it’s better to have the information on hand with your own spreadsheet. Don’t be mistaken, it’s work.

Capital Gains Explained

Let me start by explaining what a capital gain is. In short, the money you make from your shares is called capital gains, and the money you lose is a capital loss.

For a more detailed explanation … When you purchase 100 shares in company A for $10 each, you have invested $1,000 plus the transaction fee.

When you decide to sell the shares at $12, you receive $1,200 for the proceeds minus the transaction fees. Your capital gain is your proceeds minus your cost.

$1,000.00 = 100 shares @ $10
$9.95 = transaction fee
$1,009.95 = full cost of purchase
$10.0995 is essentially your per-share cost

$1,200.00 = 100 shares @ $12
$9.95 = transaction fee
$1,190.05 = proceeds from disposition

Capital Gains (or Losses)

Your result now depends on this last simple math equation :)

Share Proceeds – Share Purchase = Capital Gains (or Losses)
$1,190.05 – $1,009.95 = $180.10 in capital gains
A negative number represents a capital loss

Feel free to look at the Canada Revenue Agency’s (CRA) information on the topic.

Income Tax on Capital Gains

Capital Gains Tax Rate

The income tax on your capital gains is calculated on 50% of your profit, also known as the inclusion rate. Because of the 50% inclusion rate, capital gains have a preferred income tax rate. The formula for your final income tax is the following:

Income Tax = Capital Gains * 50% * Marginal Tax Rate

If your investments are held in an RRSP, TFSA or RESP, you do not have to report your capital gains as those accounts are tax-free. It’s only for your non-registered accounts.

Under new capital gains tax rules for 2024, the inclusion rate will be 66.67% if you declare more than $250,000 in capital gains.

Currency Exchange

If you happen to sell your shares in a currency other than Canadian, you will need to report profits from the currency exchange. In the case of a loss, you want to remove it from your capital gains.

The CRA has a very generic rule for reporting currency exchange but as you can see in my ACB tracking sheet, I like to track my currency exchange based on the exchange rate on the day of the transaction.

The Bank of Canada makes it easy for investors to get access to the exchange rate – use the Bank of Canada currency converter for the rate of that day.

Superficial Loss

Be careful with the superficial loss. If a transaction generates a loss that you apply for the tax year but re-purchase shares from the same company within 30 days, you cannot apply the capital loss for the year.

You can use the transactions in calculating your ACB but you cannot use it as a capital gains deduction

Capital Gains Income Tax Summary

In summary, you only have a few bookkeeping items for every transaction during the tax year (the calendar year).

Track all your share transactions (Technically, you only need to track those in your non-registered account)
Include your currency conversation per transaction (or as approved by the CRA)

If you happen to have capital losses, you can use them against capital gains. There are certain rules for applying them to past capital gains but you can also retain them for the future. The rules can change from year to year so make sure you follow up with a tax accountant when trying to make use of capital losses outside of the current year.

Note that any capital gains incurred inside an RRSP, RESP or TFSA are ignored. Withdrawing money from those accounts has its own respective rules.

Understanding Capital Gains Tax