If you dispose of a capital asset, you typically incur a gain or a loss. The Canada Revenue Agency has strict reporting rules on capital gains, and it allows you to offset gains with losses. To ensure your compliance with Canadian tax code and that you don’t pay more tax than necessary, it’s important to understand how capital gains and losses work.
Calculating Capital Gains and Losses
To calculate capital gains, start with the proceeds of disposition. This may be the money you received for selling a property, the insurance payout you obtained if the property was destroyed, or any other type of proceeds you earned in exchange for disposing of an asset. If you gave the asset away, you must use its fair market value as the proceeds of disposition.
Then, you need to subtract the adjusted cost base. The ACB is the purchase price of the asset plus any significant maintenance costs or capital improvements. Finally, you need to subtract expenses incurred from selling the asset. The difference is your capital gain or loss.
To explain, imagine you sold an asset for $100,000. You originally purchased the asset for $50,000, invested $20,000 in capital improvements, and spent $2,000 selling the asset. In this case, your total costs are $72,000, and your capital gain is $28,000. Conversely, if you sold the same asset for only $50,000, you would have a capital loss of $22,000.
If you dispose of capital property, you must report the gain or loss to the CRA on your tax return for the same year. For example, if you disposed of capital property in March, 2016, you have to include that information on your 2016 tax return. Use Schedule 3 to calculate your gains or losses.
Taxable Capital Gains
In almost all other cases, half of your capital gains are taxable. For example, if you have $100,000 in capital gains, $50,000 is taxable. Similarly, you should also calculate capital losses in the same manner. To wit, if you have a $50,000 capital loss, you may use $25,000 to offset your capital gains. However, there are some exceptions to the capital gains rule as well as some special deductions you can use to lower your capital gains.
Exemptions and Deductions
If you sell your primary home, the CRA does not require you to report a capital gain, and by extension, you do not have to worry about capital gains tax. However, as of October 2016, you are required to report the disposition of your primary residence to the CRA on your tax return. You just have to report basic details, such as the amount of the sale and the date when you acquired the property.
The CRA also offers a capital gains deduction for the disposition of small business corporation shares or qualifying farm or fishing property. For example, as of April 2015, you may claim a lifetime deduction worth up to $500,000 on taxable capital gains from farm and fishing property. To ensure you claim all of your exemptions and deductions correctly, you may want to use quality tax preparation software.