Do you have a capital gain?
Generally, you have a capital gain (or loss) when you sell (or are considered to have sold) capital property.
What is capital property?
Capital property is any property (depreciable or non-depreciable) that, if sold, would result in a capital gain or loss. Capital property is usually bought for investment purposes or to earn income. Some examples are cottages, land, buildings, equipment you use in a business or rental operation and securities (like stocks, bonds, or units of a mutual trust). Personal items (like your home) are not considered capital property.
When to report a gain or loss?
You report the disposition of capital property in the calendar year that you sell (or are considered to have sold) the property. Even if you do not have to pay tax as a result of the taxable capital gain or loss, you have to file an income tax and benefit return (T1 General) to report the transaction.
What happens if you have a capital gain?
If you have a capital gain, you may be able to reduce or offset all or part of the gain by claiming a capital gains deduction.
What is a capital gains deduction?
Canadian residents are entitled to offset capital gains using their cumulative lifetime capital gains exemption (LCGE). For 2018, if you had a capital gain arising from qualified small business corporation shares, you may be eligible to claim the LCGE up to $835,716. Because you only have to pay tax on half of the capital gains, your cumulative capital gains deduction is $417,858.
Does that mean I get $417,858 from the government?!
Unfortunately, no. Capital gains are taxed at 50% of the gain. That means if you have a capital gain of $50, you only have to pay tax on $25 of it. If the capital gain of $25 was on qualified small business corporation shares, you can use $25 from you LCGE of $417,858 to avoid paying tax on this gain. After using your LCGE, it would drop from $417,858 to $417,833, which you could use to avoid paying tax in the future on similar capital gains.
What happens if you have a capital loss?
If you have a capital loss, you can use it to reduce any capital gains you have that year (up to zero). If your capital losses are more than your capital gains, you have a net capital loss. Generally, you can apply your net capital losses to taxable capital gains up to three tax years into the past and to any taxable capital gains of any future years.
How do you calculate your capital gain or loss?
To calculate your capital gain or loss, you need to know:
- The proceeds of disposition (how much you sold it for);
- The adjusted cost base (how much you paid for it when you bought it);
- Any expenses you incurred to sell the property.
Your capital gain or loss is calculated by subtracting the total of your property’s adjusted cost base (2) and any expenses you incurred to sell the property (3) from the proceeds of disposition (1). It looks like this:
CAPITAL GAIN = 1–2–3
What’s a capital gain reserve? Could I have a taxable capital gain even if I didn’t sell property? If I sell my home, can I use the Principle Residence Exemption to avoid paying tax on the gain? What is the Principle Residence Exemption?
There is a lot to capital gains tax which can’t all be covered in one blog article! To learn more please book a consultation to discuss your unique situation with the experts.
You can also check out CRA’s super fun publication about capital gains: