Capital gain is the profit earned on the sale of a ‘capital asset’. Canadian Revenue Agency (CRA) defines securities in the form of shares, investment properties, bonds, and stocks as well as real estate as “capital assets”. Capital gain results when the selling price of an asset exceeds its purchase price.
Investments yield income when they are held and create capital gains when sold. We pay income tax on the income generated by investments and pay capital gain tax when investments are sold at a profit. CRA requires the following amounts to calculate any capital gains:
(i) Proceeds of the disposal: The selling price of the capital asset.
(ii) Adjusted cost base (ACB): How much is originally paid for the capital asset.
(iii) Outlays and expenses: Costs deemed necessary before selling, for example, fixing-up expenses, finder’s fee, commissions, broker’s fee, surveyor’s fee, legal fees, transfer taxes, and advertising costs.
Capital gains can be of two types: realized and unrealized.
(i) A realized gain occurs when a capital asset is sold at a level that exceeds its book value.
(ii) An unrealized gain is a potential profit resulting from an investment. This is a paper gain, reflecting an increase in capital investment’s value but has not yet triggered a taxable event, as the capital asset is yet to be sold.
Capital gains are taxed only when they are realized. Realized capital gains are further classified as long-term and short-term.
(i) Long-term capital gains are derived from assets that are held for more than one year before they are disposed of.
(ii) Short-term capital gains are derived from assets that are held for a year or less.
Capital gain tax rates depend on how long the seller owned or held the capital asset. You cannot earn any benefit from any special tax rate on short-term capital gains. Instead, these profits are usually taxed at the same rate as your ordinary income. Long-term capital gains are taxed at a lower rate than short-term gains. This tax policy is adopted to encourage investors to hold assets subject to capital gains for more than a year. A lower tax rate on long-term investment is an incentive given to invest in the economy-building companies rather than aiming to generate quick profits.
CRA’s tax laws surrounding capital gains taxes are more complicated than generally presumed by tax filers. In Canada, if you make money off a capital asset, you pay capital gains tax on it. You cannot play tips or tricks or exploit the loopholes in tax laws to avoid your tax liability on capital gains. Here you need to take on board a capital gain tax accountant to help you legally, and effectively mitigate the tax impact on capital gains.
Every tax type has different requirements, rules, and thresholds, finding all this data can create confusion and errors. The best course of action to make this job less stressful would be to consult a capital gain tax accountant or a reputable accounting firm. Doing this will keep more of your capital gains for yourself. There are plenty of ways to defer, reduce or even avoid capital gain tax. Tax accountant’s professional advice can prove these investment returns to be the most tax-friendly investment returns. He can help you determine what works best in your specific situation.
There are online directories comprising lists of several tax advisors. You can shortlist a tax accountant for advice on capital gain tax considering the following:
If you are looking for a professional Tax Accountant who can lead you through the process of claiming business expenses on your tax return, then feel free to reach out to Filing Taxes at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.