Separations are chaotic enough without having to throw capital gains tax into the mix.
In this article, I will give you an overview of capital gains tax, how it’s calculated, and how it’s generally divided between the exes at separation.
What is Capital Gains Tax?
The process of making sure that both of you get an equal share of all property, capital assets, and debts will give rise to important tax considerations.
Capital assets are significant pieces of property, which when sold get you a higher price than what you paid originally. Examples include:
- cryptocurrency;
- bonds;
- non-registered investments like mutual funds and company shares;
- rental properties;
- family home; and
- antiques and collectibles.
Your “capital gains” is the difference in value between the new sale price and the original price.
For tax purposes, you “realize” capital gains when you sell the asset. That’s when you pay the “capital gains tax” on that asset. Until you sell it, any increase (or loss) in the value of your assets will remain “unrealized.” That means you don’t pay taxes on it yet.
So, you don’t generally pay capital gains taxes until you sell assets for a profit.
Calculating Capital Gains Taxes
Calculating your capital gains taxes can be tricky, because you have to consider a few factors.
First, CRA will tax your capital gains as a part of your total income for the year.
Second, once you “realize” your capital gains after selling an asset, the CRA will count that towards your income for the tax year in which the asset is sold. This can help or hurt depending on your employment income for that particular year. If your employment income for this year already puts you on a high marginal tax rate, then any added gains will push you to an even higher rate for that tax year.
Third, the CRA will tax only a portion, not all, of your capital gains. This is called the “capital gains inclusion rate.” As of October 2024, the inclusion rate for an individual is 50% on the first $250,000, and 66.67% on amounts over $250,000.
Here is a general formula. Your “Proceeds of Disposition” is the asset’s sale value. The “Adjusted Cost Base” is the original purchase amount, including any commissions, acquisition costs, transfer taxes, and legal fees. The total cost of sale – including any commissions, advertising costs, and broker’s fees – becomes your “Outlays and Expenses.”
Capital Gain or Loss = Proceeds of Disposition – (Adjusted Cost Base + Outlays & Expenses)
In short, how much you owe in capital gains tax will depend on your total income for the year, your federal and provincial marginal tax rates, and your capital gains inclusion rate.
Capital Gains Division on Separation
Any family property or investment that has increased in value since purchase attracts capital gains tax.
In general, you won’t have to pay capital gains taxes on your family home or principal residence if you buy your ex out or vice-versa. This is the “principal residence exemption.”
It can be tricky to figure out which property is the family home when multiple real properties are involved, or when after separation one of you lives in a different home. Depending on the situation, both of you may be eligible for this exemption.
Keep in mind that the exemption applies to a specific tax year. That means, if after separation you move out of the family home and move into an investment condo, then you can only claim one of the properties as your “principal residence” for that year of separation.
Say, if that investment condo was previously rented, then you moving in could attract taxes, due to the change in use from income-producing to personal use. Check out Real Estate Division to learn more.
Fair division of assets and capital gains taxes are part and parcel of divorce settlements. You can both transfer investment assets to each other on a tax-deferred basis.
Imagine that your ex gets all the tax-free assets like the TFSAs or the family home. You get the tax-deferred assets like the investment condo, the RRSPs, and the mutual funds. The difference between the two is who pays and when. With the tax-free assets, your ex won’t have to pay taxes on the assets later. But with the tax-deferred assets, you will be paying taxes when you sell down the road. This means that you may end up with less than your fair share after you cash-out.
What Can You Do?
Ultimately, the CRA rules around splitting capital gains taxes are highly specific to your personal circumstances. So it’s very important to keep detailed agreements, documents, and receipts on your family home, other financial assets, and related buying or selling expenses.
Refer to the CRA bulletin on Principal Residence and the Capital Gains Guide to learn more. See BC Taxes at Separation or Divorce for our general guidance on tax responsibilities at separation. Also check out this YLaw article as well: How to Deal with Spousal Support and Tax Consequences in BC?.
This area of law is complex, complicated, and constantly changing. Call 604-974-9529 or get in touch with our experienced family lawyers to find out about your tax rights and obligations.
