What are Capital Gains?

Capital Gains is the profit made from selling a capital asset or investment. Capital gains are a taxable income.

Capital Gains in Detail

Capital gains stand for a profit made on selling a capital asset or investment. Capital gains are added to income and are eligible for taxation. Some examples of capital assets are shares, bonds, real estate, art, promissory notes, etc.

When to declare Capital Gains

You need to declare capital gains if you sell an investment for an amount higher than the original purchase price. Note that out of the gained amount, only 50% is taxable at the applicable marginal tax rate. For instance, let's take a property, which was purchased originally for $18,000, is sold for $25,000. The capital gain on this sale is $7,000. So the taxable amount is $3500. If you're a resident of Ontario and you fall under the topmost category, the tax will be calculated at approximately 43%. So in this example, the tax will be approximately $1505.

In the case of a Capital Asset or Capital investment with more than one owner, the taxable amount is split among the owners on the basis of ownership stake. Taking the above example, if two people own the asset at 50% each, the calculation of tax for each stakeholder is on $1750, and not $3500.

Gains made on selling a principal residence are exempt from capital gains tax. A principal residence can be an apartment, house, cottage, mobile home or houseboat. A taxpayer and spouse, combined, can have only one principal residence for years after 1981. Typically, CRA considers 0.5 hectares or 1.25 acres of property as a principal residence. So if a property is more than this area, gains made on selling the excess land are liable for capital gains tax.

Note that if a property was not a principal residence for all the time you've owned it, the sale needs to be reported. Say for instance you bought a property in 1995 and started living in it as a principal residence only after 2005. If this property is sold in 2014, you need to report it, and you can claim a tax exemption for years between 2005 and 2014.

There is an exception on sale of assets owned over a long period such as small businesses, farms, or fishing property, are sold off. Typically the initial investment value in such assets is very low. Such a sale may lead to significant capital gains, thereby increasing the tax liability. However, this tax liability can be minimized by using the Lifetime Capital Gains Exemption (LCGE). As of 2014, there is an exemption of $800,000 for gains made on sale of such assets. Let's take, for example, selling a business with minimal primary investment for $3 million. So, $800,000 is exempted out of the total amount gained.

If certain types of properties or investments are donated to recipients qualified by CRA, there will be no capital gains. An example of such a property is donating land in an environmentally sensitive zone.

How do Capital Gains affect your Tax?

Capital Gains are considered as part of your holistic income. You can calculate the amount of Capital Gains Tax due on the Capital Gains Tax Calculator or calculate capital gains tax as part of your income on the Canadian income tax calculator

Canadian Tax and Finance Guides