Capital Gains & Tax 101

A capital gain can be defined as an increase in the value of an asset (stocks, shares, etc.) from its original cost price.

There are two forms of capital gain:

• Realized capital gain: You have a realized gain when you sell an asset for a higher price than you bought it.
• Unrealized capital gain: This occurs when there is an increment in the value of your asset, but you haven’t sold it.

Therefore, you only ‘realize’ a capital gain once you sell that particular asset that has increased in value. However, you must know that a realized capital gain isn’t just yours to possess, and the government takes a cut from it by way of tax.

How is Capital Gain Taxed in Canada?

Capital gain gets taxed at a rate of 50% in Canada. Once you realize a capital gain, you’ll need to add 50% of the capital gain to your revenue. This means the portion of extra tax you pay will differ depending on how much you’re earning and what other sources of earnings you possess.

The only way you can have a capital gain without being taxed on it by the government is if your investments are registered in tax-sheltered plans like Registered Retirement Savings Plan (RRSP), Registered Retirement Plan (RPP) or Registered Education Savings Plan (RESP).

Apart from these plans, your capital gain will be taxed. You must know how to calculate said capital gain tax.

How To Calculate Capital Gain Tax?

Before effectively calculating your capital gain tax, you must know some significant amounts. They are:

Adjusted Cost Base (ACB):

The price of an investment, including any costs related to obtaining the capital property.

Dividends of Disposition:

This refers to the amount you have profited by selling your capital asset. This is the amount gotten when you deduct any outlay or expense you may have incurred by selling.

Expenses Required to Sell:

These are any outlays you may have to make when selling your capital property.

Capital gain subject to tax = Selling price – the Adjusted Cost Base

Bottom Line

Ultimately, you possess a capital gain when you sell a capital asset for a higher amount than the total of its ACB and the outlays and expenses incurred to trade the property.