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Capital Gains and Losses

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Personal Income Tax -
Filing Your Return
 
Stocks, Bonds etc. - > Capital Gains and Losses

Capital Gains and Losses

Income Tax Act s. 3(b), 38(a), 248(1)

A capital gain or loss is the gain or loss resulting from the sale of property, such as stocks, bonds, art, stamp collections, real estate, and promissory notes.  Gains or losses from bad debts, foreign exchange and call and put options are also normally considered capital gains or losses.  Some assets are considered personal-use property, such as cottages, cars, boats, and furniture (unless these are business assets).  Some personal-use property is considered listed personal property (LPP), such as works of art, and stamp collections.  The gains and losses for personal-use property and LPP are calculated separately from gains and losses on other capital assets.  See our articles on Listed Personal Property and Personal-use Property for more information.

A loss on shares or debt may be considered a business investment loss instead of a capital loss, in certain circumstances.  See our link below to the article on business investment losses.

A taxable capital gain is 50% of a capital gain.  The capital gain or loss is calculated by deducting the original cost of the asset from the proceeds received on the sale of the asset.  Because only 50% of the gain is taxable, less tax is paid on capital gains than on income such as interest.

An allowable capital loss is 50% of a capital loss.  It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income.

Capital gains and losses are recorded on Schedule 3 of the personal income tax return, by reporting the proceeds of disposition less the adjusted cost base.  When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year.

When a capital property is owned by more than 1 person, such as a taxpayer and spouse, the proceeds of sale would normally be allocated to each owner based on their percentage ownership.

Capital gains can be reduced, deferred, or eliminated by:

bullet $750,000 capital gains exemption - increased to $800,000 for 2014, then indexed for inflation
bulletPrincipal residence exemption
bullet Donating capital property instead of cash can eliminate capital gains or increase your donations limit
bulletCapital gain reserve - you may be able to spread your capital gain over a number of years
bulletElection to designate the amount of proceeds on donated capital property
bulletThe transfer of capital property to a spouse or spousal trust on death
bulletTax treatment of income from investments in call and put options

For more information see the following articles:

bullet Try to earn your investment income (outside of RRSPs) at the lowest tax rate possible
bullet Capital Losses - carry-back rules, inclusion rates (IR) for prior years
bulletTransfer shares to an RRSP or TFSA, but not at a loss!
bullet Business investment loss and allowable business investment loss (ABIL)
bulletTax treatment of income from different investments
bulletSuperficial losses
bulletWorthless shares or debt

See the Canada Revenue Agency Capital Gains Guide T4037 for more information.

Tax Tip:  Only 50% of a capital gain is taxed, and the gain is not included in income until the item is sold, allowing you to compound your returns tax-free until you sell.

 

Revised: April 13, 2016

 

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