What are capital features?
You’ve got a capital acquire whenever you promote an asset or funding for greater than it price you to amass it. In the event you bought $100 price of inventory after which offered these shares for $150 two years later, for instance, you’ll have a capital acquire of $50. Then again, whenever you promote an asset for lower than its authentic buy value, that’s referred to as a capital loss.
Capital features and losses can happen with many kinds of investments and property, together with shares, bonds, shares in mutual funds and exchange-traded funds (ETFs), rental properties, cottages and enterprise belongings. Capital features typically don’t apply to some kinds of personal-use property, corresponding to automobiles and boats, whose worth tends to lower over time. In addition they don’t apply to the property you reside in—your principal residence.
Capital features are taxable in Canada. The worth of a capital acquire is handled as revenue earned through the tax 12 months wherein it was realized. There are, nonetheless, vital exceptions to those guidelines, which we’ll run by means of under.
Watch: Capital features tax, defined
What’s the capital features tax fee in Canada?
Many Canadians mistakenly consider that the complete capital acquire is taxed at a fee of fifty%. In reality, solely 50% of a capital acquire is taxable, and the speed will depend on the place you fall throughout the federal and provincial revenue tax brackets within the 12 months you report the acquire. The acquire is added to your taxable revenue. There’s no single “capital features tax fee” in Canada, as a result of the speed will depend on how a lot you earn. The upper your whole revenue (together with employment) is for the 12 months, the extra tax you’ll be able to count on to owe on a capital acquire.
Additionally vital to know: A capital acquire is taxed solely as soon as it’s “realized,” that means the asset has been offered. So long as the acquire is “unrealized,” that means the asset’s worth has elevated on paper however the asset stays in your possession, you shouldn’t have to pay taxes on it.
Let’s say you notice a capital acquire of $50,000 this 12 months. Half of that quantity ($25,000) should be reported as revenue in your tax return whenever you file subsequent 12 months. In the event you fall in a 33% marginal tax bracket—the very best federal tax fee in 2023—the extra $25,000 in revenue leads to $8,250 in taxes owing. The remaining $41,750 is yours to maintain. And if you happen to fall inside a 26% marginal tax bracket, the identical capital acquire leads to $6,500 in taxes owing—that means you retain $43,500.
With the tax charges we at present have in Canada, and the truth that solely half of a capital acquire should be reported as revenue, nobody is paying greater than 27% in capital features tax. Most individuals pay a lot much less.
Tips on how to calculate capital features and losses
You’ll be able to calculate whether or not you might have a capital acquire or loss by subtracting the asset’s internet price of acquisition from the online proceeds of its sale.
So simple as that will sound, there’s a bit extra to it. To make sure you observe capital features tax guidelines as set out by the Canada Income Company (CRA), you’ll must know the adjusted price base (ACB), outlays and bills, and proceeds of disposition.
