What is Capital Gain or Loss?
In simple words, capital gain or loss refers to the difference between the purchase and sale prices of capital properties, as defined by Canada Revenue Agency. When the sale price is higher than its original purchase price it means a capital gain. When the sale price is lower than the purchase price, you have a capital loss.
Now, what constitutes the capital properties?
There are several types of capital properties that incur capital gains when you sell them. Common ones include:
- Stocks and bonds
- Units of a mutual fund trust
- Land
- Buildings
- Real estate
- Equipment used for a business
- Work of Art
- Stamp collections
Certain types of property are not subject to the rules of capital gains. A home that has served as your principal residence is exempt from capital gains tax—as long as it has been your primary residence for all the years you’ve owned it or for all years except one. (Principal residence exemption is a separate topic that will be discussed in future blogs)
How to calculate Capital Gains or Loss?
To calculate your capital gain or loss you need to know the following 3 numbers:
- The proceeds from the sale of property
2. The adjusted cost base (ACB) which is the amount you originally paid to purchase the capital property including any additional costs incurred during ownership for renovations, as well as any costs paid to acquire the property.
3. The outlays and expenses incurred to sell your capital property. These can include legal fees, selling commissions, surveyors’ fees, fixing-up fees, brokers’ fees, advertising costs and transfer taxes.
Once you have those three numbers in hand, here is how you can calculate the capital gains or loss:
Proceeds of disposition
Less: Actual cost base
Less: Outlays and expenses
= Capital gain or Capital loss
How much of the above is the taxable amount of capital gain?
When you have a capital gain only 50% of the capital gain will be taxable and included in your income. This means if you’ve made $4,000 in capital gains, $2,000 of those earnings need to be added to your total taxable income.
The amount of taxes you pay on your capital gains depends on your annual income and your tax bracket. The higher your tax bracket, the more you’ll pay on your capital gains.
If you have only capital losses the allowable capital loss will be 50% which you can use to offset gains reported to the CRA during the previous three years. You can also choose to carry those losses into the future—indefinitely—and apply them to another year. The only thing you have to remember is that you can’t claim a capital loss against regular income.
How to avoid Capital Gain Tax in Canada
In Canada, there are a number of ways to avoid paying capital gain tax which is considered legal. In fact, they are considered as part of tax planning only and you can take the help of a CPA/professional accountant to help you with this issue. Some of the ways in which capital gain tax liability can be reduced are.
- Put your earnings in a tax shelter
- Offset capital losses
- Take advantage of the lifetime capital gain exemption
- Use the capital gain reserve
Capital Gains provide an excellent opportunity for proactive tax planning due to a variety of tax elimination strategies available. To get the benefit of accurate tax planning for your capital gains transactions, you must hire an accounting professional/CPA.
We at Rav Bhatia CPA Professional provide all the taxation services you need.
Just click on the Contact Us form and book a free virtual consultation with us today!