What to know about Capital Gains Tax
Capital gain is defined as the profit earned on the sale of an asset that has increased in value and may include property, a business or shares.
This article will provide general information on capital gains in Canada. Each individual has a unique situation, so you should always consult a tax professional for what best suits your specific situation.
If you sell your investment at a higher price than purchased, you have to add 50% of the profit or capital gain to your income.
When you have capital gains and capital losses, you can offset capital gains with capital losses until you get to zero. With only capital losses, the CRA allows you to use the capital loss to offset a capital gain you originally declared in the previous 3 years, or you are allowed to carry forward the capital loss into the future. Check with your tax professional as rules can change.
Difference between capital gains and losses
Increase in value of your investments, (stocks, shares in a mutual fund, exchange-traded fund) or real estate holding from the original purchase price, is a capital gain. You will need to pay tax on the profit from the sale. That might sound bad but making money on your investments is never bad.
You have a capital loss, if you sell an investment for less than you paid when you bought it. This capital loss can be applied against any capital gains you had during the year to lower the taxes you owe on that amount. If your capital losses are more than your current capital gains, you have unused capital losses. You can carry back your unused capital losses to reduce your taxable gain in any of the past 3 years or carry them forwards to reduce your taxable gain in a future year.
If you only have a capital loss in a particular year, ensure it is recorded on your tax return so it gets recognized and available for carry-forward/back.
Suppose you have investments in registered plans such as a Registered Retirement Savings Plan (RRSP), Registered Retirement Plan (RPP) or Registered Education Savings Plan (RESP). You don’t have to worry about capital gains and losses because the investments are tax-sheltered. That means your investments can grow and you don’t have to worry about changes in value until you withdraw the funds. If you have non-registered investments, capital gains are something you'll absolutely need to know about.
Scott Gray, CPA, CMA and his team lead a full-service accounting practice based in Oakville, Ontario, offering a broad range of services to meet the needs of businesses, entrepreneurs, and individuals in Oakville, Burlington, and surrounding areas.