When you invest, you buy assets like stocks, bonds, or real estate. The government calls these capital property. If you sell a piece of capital property for more than you paid, you have a capital gain. If you sell it for less, you have a capital loss.

It's that simple. The key word here is "sell." You don't have a gain or a loss just because the value of your investment goes up or down on paper. The tax event only happens when you sell the asset and realize the gain or loss. Until then, any change in value is an unrealized gain or loss, and the Canada Revenue Agency (CRA) isn't involved.

To figure out your capital gain, you need two numbers: your proceeds of disposition and your adjusted cost base (ACB).

• Proceeds of Disposition: This is just the sale price of your asset.
• Adjusted Cost Base (ACB): This is the original purchase price plus any costs you paid to acquire it, like trading commissions or legal fees.

The basic formula is straightforward.

Let’s say you bought 100 shares of a company for $10 each, and paid a $10 commission. Your ACB is (100 \times \10) + $10 = $1,010$.

If you later sell all those shares for $1,500, your capital gain is \1,500 - $1,010 = $490$.

But you don't pay tax on that full amount. In Canada, only a portion of your capital gain is taxed. This portion is determined by the inclusion rate. For many years, this rate has been 50%.

Using our example, your taxable capital gain would be \490 \times 50% = $245. This \245 is added to your income for the year and taxed at your personal marginal tax rate, just like salary or any other income.

A capital loss isn't just a financial setback; it can also be a useful tool for managing your taxes. If you have both gains and losses in the same year, you can use the losses to cancel out the gains.

Imagine in the same year as your $490 gain, you also sold another investment for a $300 loss. You can subtract that loss from your gain, leaving you with a net capital gain of only $190. Your taxable portion would then be just \190 \times 50% = $95$.

What if your losses are greater than your gains? Or what if you have losses but no gains in a particular year? You don't lose the tax benefit. The CRA allows you to carry your net capital losses to other years.

This flexibility means a losing investment in one year can directly reduce your tax bill in a different, more profitable year. You just have to file the right forms with your tax return to apply the losses.

In Canada, not all investment accounts are treated the same when it comes to tax. The rules for capital gains and losses depend on whether you're investing in a registered or non-registered account.

Registered Accounts These are accounts like a Tax-Free Savings Account (TFSA), a Registered Retirement Savings Plan (RRSP), or a Registered Education Savings Plan (RESP). They have special tax-sheltering rules.

Inside a TFSA, any investment growth, including capital gains, is completely tax-free. You can withdraw money without paying any tax. The flip side is that you cannot claim a capital loss if an investment in your TFSA goes down in value.

Inside an RRSP or RESP, your investments grow tax-deferred. This means you don't pay any capital gains tax each year. You only pay tax when you withdraw money from the account, at which point it's taxed as regular income.

Non-Registered Accounts These are standard investment accounts with no special tax status. They are often called cash or margin accounts. Any time you sell an asset in a non-registered account, you must report the capital gain or loss on your tax return for that year. These are the accounts where all the rules about inclusion rates and carrying losses apply.

Understanding these differences is fundamental to smart investing. Knowing how capital gains tax works lets you anticipate your tax bill and make informed decisions about when to sell your investments.