CAPITAL GAINS / LOSSES

Capital Gains receive preferential treatment under the Canadian Tax System.  This is primarily because investments carry a certain amount of risk but at the same time, stimulate economic growth within Canada.

A PRIMER

In general, a capital gain is the difference between an assets cost base and the proceeds of disposition when the asset is sold.  The difference represents the capital gain or loss and becomes the profit or income from the asset.  In most cases, a capital gain is not recognized as income until the asset is sold allowing for the deferral of tax until there is cash from the sale to pay the income taxes.

TERMINOLOGY

• Proceeds of Disposition is the amount received on the sale of the asset. 
  
• Outlays and Expenses from the disposition of the asset are the expenses incurred to sell the asset.  For example, a real estate transaction would include Realtor commissions and Lawyer fees.
  
• Cost Base is the amount original paid to acquire the asset.
  
• Adjusted Cost Base is the Cost Base plus expenses incurred to improve the asset.  Using the real estate example, this could include adding a garage or replacing the roof or furnace.

Capital Gains are taxed based on the “Inclusion Rate” in effect at the time of sale or realization of the disposition of the asset.  Since 1972 when Capital Gains taxes came into effect, the Inclusion Rate has varied:

HOW THIS WORKS

Let’s say you own a home that you rented to a third party.  You purchased it on July 1^st, 2000, for $125,000 plus legal fees of $1,500.  Since then, you have collected the rent but also spent $25,000 to improve the property.  Your Adjusted Cost Base is $151,500. 
($125k + 1.5k + $25k = $151,500)

You decide that it’s time to retire and sell the property for $500,000 and incur expenses of $15,000 real estate commissions and $3,000 in legal fees.  Your Proceeds of Disposition are $500,000 and your Outlays and Expenses are $18,000.

The Capital Gain becomes $366,500.  The date of closing becomes the sale date.  If the sale closed on June 24, 2024, your Capital Gain Inclusion would be $183,250 ($366,500 * 50% = $183,250) which would be taxed at your Marginal Tax Rate.

JUNE 25, 2024, CHANGE

Effective June 25, 2024, legislative changes have been put in place that changes the Inclusion Rate to 66.67% on Capital Gains more than $250,000 per calendar year.  Therefore, a sale on June 25, 2024, results in a double calculation.

The Taxable Amount of the Capital Gain in 2024 will be $202,705.50 ($125.k + $77.705k) and taxed at the Marginal Tax Rate of the individual.

Structuring Matters

Real Wealth Management™ involves the structuring of sources of income, types of income and in some cases when and how the income will be taxed.  Contact us to see how we can help you.