What are capital features?
You have got a capital achieve whenever you promote an asset or funding for greater than it price you to amass it. In case you bought $100 price of inventory after which offered these shares for $150 two years later, for instance, you’d have a capital achieve of $50. However, whenever you promote an asset for lower than its authentic buy value, that’s known as a capital loss.
Capital features and losses can happen with many varieties of investments and property, together with shares, bonds, shares in mutual funds and exchange-traded funds (ETFs), rental properties, cottages and enterprise belongings. Capital features usually don’t apply to some varieties of personal-use property, similar to vehicles and boats, whose worth tends to lower over time. Additionally they don’t apply to the property you reside in—your principal residence.
Capital features are taxable in Canada. The worth of a capital achieve is handled as earnings earned throughout the tax yr wherein it was realized. There are, nevertheless, necessary exceptions to those guidelines, which we’ll run by beneath.
Watch: Capital features tax, defined
What’s the capital features tax charge in Canada?
Many Canadians mistakenly consider that the complete capital achieve is taxed at a charge of fifty%. In reality, solely 50% of a capital achieve is taxable, and the speed will depend on the place you fall inside the federal and provincial earnings tax brackets within the yr you report the achieve. The achieve is added to your taxable earnings. There’s no single “capital features tax charge” in Canada, as a result of the speed will depend on how a lot you earn. The upper your complete earnings (together with employment) is for the yr, the extra tax you’ll be able to anticipate to owe on a capital achieve.
Additionally necessary to know: A capital achieve is taxed solely as soon as it’s “realized,” that means the asset has been offered. So long as the achieve is “unrealized,” that means the asset’s worth has elevated on paper however the asset stays in your possession, you should not have to pay taxes on it.
Let’s say you notice a capital achieve of $50,000 this yr. Half of that quantity ($25,000) have to be reported as earnings in your tax return whenever you file subsequent yr. In case you fall in a 33% marginal tax bracket—the very best federal tax charge in 2023—the extra $25,000 in earnings ends in $8,250 in taxes owing. The remaining $41,750 is yours to maintain. And in case you fall inside a 26% marginal tax bracket, the identical capital achieve ends in $6,500 in taxes owing—that means you retain $43,500.
With the tax charges we at the moment have in Canada, and the truth that solely half of a capital achieve have to be reported as earnings, nobody is paying greater than 27% in capital features tax. Most individuals pay a lot much less.
Learn how to calculate capital features and losses
You may calculate whether or not you have got a capital achieve or loss by subtracting the asset’s web price of acquisition from the online proceeds of its sale.