It’s time to get a little more in depth on Emigrating from Canada.

Today let’s dig into the differences in how Capital Gains are taxed in Canada vs the United States

A quick primer:

A capital gains occurs when you sell an asset for a higher price than you paid for it.

In both countries there are a number of situations where calculating capital gains is not required (I.e. the Principal Residence Exemption in Canada) and I will dig into some of those in a couple of weeks.

For this week, let’s simply look at capital gains in a taxable investment account.

After you’ve maxed out your retirement account contributions and also your TFSA/Roth contributions you’re left with investing in a taxable investment account.

Not only does this introduce taxes on dividends, interest or other types of cash and non-cash distributions, you also need to claim any capital gains when you sell any portion of an investment holding.

Both Canada and the US will apply tax on the money you made but this is where the similarities between the two tax regimes ends.

Let’s assume you paid $10,000 and bought an ETF. Exactly one year later that ETF is now worth $15,000. You sell it all because you want to go on a vacation.

In Canada the math looks like this.

$15,000 proceeds - $10,000 cost = $5,000 capital gains

50% × $5,000 = $2,500 taxable at your marginal tax rate

That 50% figure? That’s what we call the Inclusion Rate and for individuals, you get half of your gains tax free up to an annual limit. The other half is added to your income for the year and taxed.

In the United States the math is slightly different:

$15,000 proceeds - $10,000 cost = $5,000 gain

That $5,000 gain goes directly onto your ordinary income. The US does NOT use an inclusion rate like in Canada so the full value of the gain is taxed.

HOWEVER, what if you waited ONE MORE DAY to sell that investment?

In Canada, the math is exactly the same. Nothing changes.

In the United States though, it changes a lot.

The US operates on a Short-Term/Long-Term Capital Gains system.

Short-term gains are applicable for any asset sold one year or less from the date of purchase. Short-term gains are taxed as ordinary income.

Long-term gains are for any asset held for longer than one year. Because you’ve waited that one additional day this is how it looks

$15,000 proceeds - $10,000 cost= $5,000 gain.

For 2024, the US charges 0% on any gains up to $47,025 total for individuals (for couples it’s higher). In this case you’d pay nothing in US Income tax and get to keep the full $5,000 you made. The US does tax on gains starting above $47,025 but the amount tops out at 20% on gains above $518,000.

What about capital losses? Just like in Canada, you can deduct losses from gains in the US but pay attention because only Short-term losses can be deducted from Short-term gains and Long-term losses deducted from Long-term gains. You would pay tax on the NET amount in each case.

There is one part of the US system that is my favorite.

In Canada you can carry forward losses but they can only be applied against future gains NOT against income like in the United States.

If you have a net Capital Loss in a year, you can use that deduct from your income up to a maximum of $3,000 a year. If your realized loss is larger than $3,000, the leftover can be applied in future tax years to reduce your income.

Next week I’ll talk about Lot Accounting in the US and how it relates to Capital Gains taxation.

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