Capital gain
A capital gain is a profit that results from a disposition of a capital asset, such as stock, bonds or real estate, where the amount realized on the disposition exceeds the adjusted cost base (ACB).[1] The gain is the difference between a higher selling price and a lower ACB. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the ACB.[1][2]
You report your gains or losses in Canadian dollars, using the exchange rate that was in effect on the day of the transaction or, if there were transactions at various times throughout the year, you can use the average annual exchange rate.[3]
Taxation
The Canadian government first introduced capital gains taxes in 1972.[4] Prior to that time, all capital gains were tax-free. Valuation Day for publicly traded shares and securities was established as December 22, 1971.[5]
In 1985, a $500,000 capital gains exemption was introduced for Canadians that was subsequently decreased to $100,000 in 1988. The exemption was repealed in 1994.[6] Form T664[7] was a tax form used to make an election to Report a Capital Gain on Property Owned at the end of February 22, 1994.[6]
Assets held in registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs) are exempt from tax.
Capital gains in non-registered investment accounts
In non-registered investment accounts, your capital gain is multiplied the inclusion rate to determine your taxable capital gain. Since October 2000, the inclusion rate has been 50%.[1] The inclusion rate has changed over the years.[8] Your taxable capital gain is taxed at your marginal tax rate. Capital losses can be used to offset gains in the current year, in any of the three preceding years, or in any future year.[2]
Transferring securities in kind
- Transferring securities in kind from a non-registered to a registered account (e.g. TFSA, RRSP) is a deemed disposition which will trigger capital gains tax. If there is a loss, it cannot be used to offset gains in this case.[9]
- So it is best to perform in kind contributions near the ACB, or if there is a significant loss, sell the securities first and then contribute the cash.
Principal residence exemption
When you sell your home, you may realize a capital gain. If the property was your principal residence for every year you owned it, you do have to report the sale on your income tax return.[10] Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.[11]
If you change the use of the property, you are considered to have sold the property at its fair market value. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.[12]
See also
References
- ^ a b c Canada Revenue Agency, Definitions for Capital gains, viewed February 8, 2018.
- ^ a b Canada Revenue Agency, How do you use a capital loss?, viewed February 24, 2015
- ^ Canada Revenue Agency (CRA), Calculating and reporting your capital gains and losses, viewed February 10, 2014.
- ^ Brayley, Catherine (Cathie); Kim, Lesley (September 2021). "Capital Gains Taxation in Canada: History and Potential Reforms". Canadian Tax Foundation. Retrieved December 17, 2024.
- ^ "Proclamation Fixing Valuation Days C.R.C., c. 946". Government of Canada Justice Laws Website. 2024-12-10. Retrieved December 17, 2024.
- ^ a b Heath, Jason (March 14, 2022). "Understanding the 1994 capital gains tax election". MoneySense. Retrieved December 17, 2024.
- ^ "Information for Individuals About Income Tax 1994 Capital Gains" (PDF). Government of Canada Publications. Retrieved December 17, 2024.
- ^ Inclusion rates for previous years, viewed March 10, 2015.
- ^ TaxTips.ca, Transfer shares to your registered account, but not at a loss!, viewed February 24, 2015
- ^ "Principal residence and other real estate". Canada Revenue Agency. Retrieved December 13, 2016.
- ^ "Reporting the sale of your principal residence for individuals". Canada Revenue Agency. Retrieved December 13, 2016.
- ^ "Changes in use". Canada Revenue Agency. Retrieved February 10, 2014.
Further reading
- Financial Wisdom Forum topic: "Capital Gain on Sale of Land"
- Financial Wisdom Forum topic: "Foreign Tax Credit T2209 and Capital Gain from US"
- Financial Wisdom Forum topic: "New Rules - Reporting Principal Residence Exemption"
- Financial Wisdom Forum topic: "Principal Residence Exception"
- Financial Wisdom Forum topic: "Valuation Day - 22 Dec 1971 - Publicly Traded Shares"
External links
- Canada Revenue Agency (CRA), Line 127 - Capital gains
- CRA, Deemed disposition of property
- TaxTips.ca, TaxTips.ca - Capital Gains and Losses
- National Post, A deep dive into the 'strategic' capital gain and loss planning you should do this year, 2021
- Canada Valuation Day price booklet (Minister of National Revenue, 1971), Originally archived by T.R. McCloy, scanned by Norbert Schlenker, OCR'ed and compressed by (FWF member) Peculiar_Investor. (2024-12-17)