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Worried about capital gains tax? Here’s why inclusion rates matter

An inclusion rate represents the rate the Canada Revenue Agency (CRA) uses to determine taxable capital gains and allowable capital losses. The inclusion rate helps you determine how capital gains, or the profit you receive from the sale of a property or investment, and capital losses, or any loss you see from the sale of property or investment, fit into your tax return.

How to determine dollar amounts using inclusion rate?

Imagine you sell one of your warehouses at a profit of $200,000 above the price you paid for it. The inclusion rate is 50%, so you report a $100,000 capital gain on your income tax return. On the other hand, if you sell the warehouse at $50,000 less than what you paid for it, your capital loss becomes $25,000, taking into account the inclusion rate. In most cases, you report capital gains on your tax returns the year they occur. You can report capital losses to reduce a year’s gains, which may lower the amount of money that goes towards your income taxes.

The CRA allows you to roll back losses up to three years or forward indefinitely if you have more losses than gains. When carrying losses forward, you may have to deal with different inclusion rates. You have to adjust your capital loss if the inclusion rate changes from one year to the next. The inclusion rate of 50% has been constant since 2001.

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How to calculate inclusion rate losses in previous years

If you want to apply losses from years before 2001 to a current year’s tax return, you have to do a calculation to make up for different rates. To get the new rate, divide the inclusion rate in the current tax year by the rate from the year when you had the loss. For instance, say you sold a rental property for $10,000 less than the amount you paid for it in 1990. The inclusion rate back then was 75%. Divide 50% by 75% to determine the new inclusion rate of 66.67%. Out of that $10,000, you can include $6,667 from that loss.

Inclusion rate for tax year 2022

For 2022, the inclusion rate is ½. So, in order to calculate the inclusion rate you can multiply your capital gain for this tax year by this rate to determine your capital gain. For capital losses, you follow the same process and multiply your capital loss for the year by ½ to determine your allowable capital losses. See attached inclusion rates for previous years here

When you buy or sell property, stock, or investments, knowing the inclusion rate can help you file your taxes properly. Applying these rates correctly ensures accuracy in your returns. QuickBooks can help you track expenses and income so you know what you can deduct from your taxes without a hassle. Get started with QuickBooks and join the millions of business owners who’ve joined to help their business thrive. 

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