Considering selling one of your company’s buildings or other high-dollar asset? If you dispose of a capital asset, you typically incur a gain or a loss. The Canada Revenue Agency (CRA) 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 to be sure 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, you start with the proceeds of disposition. This may be the money you receive for selling a property, the insurance payout you obtain if the property is destroyed, or any other type of proceeds you earn in exchange for disposing of an asset. If you give the asset away, you must use its fair market value as the proceeds of disposition.
Then, you need to subtract the adjusted cost base (ACB). The ACB is the purchase price of the asset plus any significant maintenance costs or capital improvements you invest in the item. Next, you need to subtract expenses incurred from selling the asset. The difference is your capital gain or loss.
To explain, imagine you sell 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 sell the same asset for only $50,000, you 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.
If you dispose of capital property in March 2018, you need to include that information on your 2018 tax return. Use Schedule 3 to calculate your gains or losses.
Understanding Capital Gains That Are Taxable
In almost all other cases, half of your capital gains are taxable. There are some exceptions to the capital gains rule as well as some special deductions you can use to lower your capital gains.
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.
Exemptions and Deductions
If you sell your primary home, the CRA doesn’t require you to report a capital gain, and by extension, you don’t have to worry about capital gains tax. 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 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.
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.
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