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Before making a major financial decision you
should consult a qualified professional.
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. These sales,
including deemed dispositions,
must be reported on the tax return, even if the property is located in
another country. Gains or losses
from bad debts, foreign exchange and call
and put options are also normally considered
capital gains or losses.
Personal-Use Property and Listed Personal Property
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.
Transfers of Income-Producing Property to a Spouse
If income-producing property, or money which is used to
purchase income-producing property, is transferred or loaned to a spouse, the income and capital
gains from the property will normally be attributed back to the person giving
the gift or loan. The treatment is slightly different for transfers to a
related minor. See our article on Attribution Rules re Gifts, Transfers, or Loans to a Spouse or a Related Minor Child.
Business Investment Loss
A loss on shares or debt may be considered a
business investment loss instead of a capital loss, in certain
circumstances. See our article Business
Investment Loss and allowable business investment loss (ABIL).
Taxable Capital Gain
A taxable capital gain is 50% of a capital gain. The capital gain or loss is calculated by deducting the adjusted
cost base of the asset plus any outlays and expenses incurred to sell the
property from the proceeds received on the sale of
the asset.
Because only 50% of the gain is
taxable, 50% less tax is paid on capital gains than on
income such as interest.
If the property is located in another
country, the original cost must be converted to Canadian $ using the
exchange rate at the time of the purchase, or at the time of becoming a Canadian
resident. The proceeds must be converted to Canadian $ at the time of the
disposition. There may be a foreign tax credit for taxes paid on the
gain in the other country, depending on the tax treaty (if any)
between Canada and the other country.
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.
When allowable capital losses exceed taxable capital gains in a
year, the difference is the net capital loss for the year.
See our article on Capital
Losses for more information about carrying these losses back or
forward, and for the treatment of capital losses on the death of a
taxpayer.
Superficial
Losses
and Non-Deductible Losses
If you plan to sell shares at a loss and buy them
back either before or after selling them, see our article on Superficial
Losses to ensure that your loss isn't disallowed.
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. 50% of the excess of capital
gains over capital losses is the taxable capital gain for the year, which is
reported on line 12700 of the tax return. See our article on Capital
Losses for information on where net capital losses carried
forward are deducted on the tax return, and how they are treated for a
deceased taxpayer.
Joint Owners of Capital Property
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. However,
there can be potential problems with joint ownership. See Joint
Ownership of Assets and in the same article, Beneficial Ownership vs Legal
Ownership.
CCPC and Capital Dividend
When a Canadian controlled private corporation (CCPC) has a
capital gain, the non-taxable portion of the capital gain can be paid out to
shareholders as a capital dividend
on a tax-free basis.
Reduction or Deferral of Capital Gains
Capital gains can be reduced, deferred, or eliminated by:
Prior to 1994 there was a $100,000 capital gains exemption which could be
used for all capital gains. On February 22, 1994, the federal government
announced that the exemption would no longer be available for capital property
or eligible capital property sold after February 22, 1994.
A one-time election was made available to allow those who owned capital or
eligible capital property at February 22, 1994, to report a capital gain on
their 1994 tax return in order to take advantage of the unused portion of their
$100,000 capital gains exemption. The election was made on form T664, and
you may have had to also complete forms T657, Calculation of Capital Gains
Deduction on All Capital Property, and Form T936, Calculation of
Cumulative Net Investment Loss (CNIL) to December 31, 1994. It was
possible that not all of the declared capital gain would be exempt, depending on
the CNIL balance.
Once form T664 was completed for a real estate property, the new adjusted
cost base was entered on the Capital Gains Election Supplementary page, in Chart
B - Other Capital Properties. When spouses completed this election for a
jointly-owned property such as a vacation
home or cottage, they would each have declared 50% of the capital gain,
so the Chart B new adjusted cost base would be 50% of the new adjusted cost base
for the property.
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.
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