Capital Gains Tax in Canada – A Simple Guide

Capital gains tax

When you dispose of —sell or transfer a capital property as a Canadian resident, this can trigger a capital gains tax in Canada. Capital property is any asset that is bought for investment purposes or bought with an intent to earn income. Some capital assets are depreciable while others are not. An example of a depreciable asset is a real estate property.

The disposal of capital property does not always lead to a capital gain, sometimes, when you sell a capital property, it can result in a capital loss.

Some common types of capital property include securities, such as stocks, bonds, units of a mutual fund trust, land, buildings, and equipment you use in a business or a rental operation.

Capital Gain (Loss) or Capital Income (Loss)

When you dispose of an asset, you need to determine if the transaction is a capital transaction or an income transaction. The sale or transfer of your capital asset can be deemed to be either a capital transaction leading to a capital gain or loss or an income transaction leading to an income gain or loss.

To determine if an asset sale transaction is a capital transaction or an income transaction, the Canada Revenue Agency (CRA) considers certain factors surrounding the specific situation such as the nature of the sale, the frequency of such transaction, the expertise of the seller in that trade, etc.

How Much is The Capital Gains Tax in Canada?

The capital gains tax in Canada is calculated on 50 percent (half) of the gains you made when you sold or disposed of a capital property in a capital transaction. If the transaction is deemed to be an income transaction such as business income, all of the gains will be taxed.

How To Calculate Capital Gains Tax Amount

To calculate your capital gain or loss tax, first, you will need to know how much capital gain or loss you had from the asset disposal. This is how to determine if you had a capital gain or loss:

Subtract the adjusted cost base (ACB) of the asset and any other expenses incurred to sell your asset from the proceeds from the sale or disposal of your asset.

Proceeds of disposition – ( Adjusted cost base (ACB) + Outlays and expenses incurred to sell your property)

Example 1. If you bought public shares of a company for $1,000 and sold them later for $2,000 while incurring a $100 commission fee to sell , this is how to calculate your capital gains:

Capital Gains = $2,000 – ($1,000 + $1,00)

Capital Gains = $2.000 – $1,100

Capital Gains = $900

Your Capital Gains Tax will be calculated on only half of your gains as follows:

Taxable Capital Gains = 50% x $900

Taxable Capital Gains = $450

This means that the government does not tax the other $450 you made on your sale. To report this capital gain, fill in the $450 amount on line 12700 of your income tax and benefit return.

How Much Capital Gains Tax Will I pay

The capital gains tax you pay will depend on your marginal income tax. The Canadian government uses a progressive income tax system to calculate your federal and provincial taxes. Half of your capital gain will be included as part of your total income for the year.

From example 1 above, if your marginal tax rate is 15%, the capital gains tax on the income earned from selling your shares is calculated as:

15% x $450 = $67.5

Your marginal tax rate is only applied to half of your total capital gains for the year.

What is Allowbale Capital Loss?

If you sell your capital asset for an amount that is less than its adjusted cost base plus the outlays and expenses involved in selling the asset, this results in a capital loss.

From the example above, if you had sold your public shares for $800, your capital loss is calculated as follows:

Capital Loss = $800 -($1,000+$100)

Capital Loss = $800 – $1,100

Capital Loss – $300

Allowable Capital Loss = 50% x $300

Allowable Capital Loss = $150

How To Reduce Your Tax With a Capital Loss

Generally, if you have an allowable capital loss in a year, you can apply it against your other allowable capital gains for that year and reduce your capital gain taxes.

For example, if you have sold another batch of public shares and made a total capital gain of $1,000, only half of this amount ($500) will be subject to capital gains tax.

You can apply your $150 allowable capital loss amount to reduce this $500 gain as shown below:

Total Taxable Capital Gain= Taxable Capital Gain Less Allowable Capital Loss

Taxable Capital Gain = $500- $150

Taxable Capital Gain = $350

This means that only $350 will be taxed in the year. If your marginal tax rate is 15%, your capital gains tax is calculated as:

Capital Gains Tax = 15% x $350 = $52.5

If your allowable capital loss is more than your capital gain, you cannot apply it to your other type of income in the year, instead, it becomes part of the computation of your net capital loss for the year. You can use your net capital loss to reduce your taxable capital gain for future years or apply it to taxable capital gain in the previous three (3) years.

How To Report Your Capital Gains Tax (Loss)

To report your capital gains tax or loss, you will need to fill out the Schedule 3 form – Capital Gains or Losses and input your net capital gain on line 12700 of your income tax and benefit return

Final Notes

You only get to pay capital gains tax when you have realized a capital gain, that is, only when you have disposed of your capital asset. Even if your asset increased in value in the year, provided that it has not been sold or transferred to another person, you will not be subject to tax.

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