The Canadian capital gains tax is an important concept that one should understand when selling investments or property in Canada. Are you an experienced investor or a person who is going to sell a second home? In any case, understanding the fundamentals of this tax can assist you in planning more effectively and preventing unpleasant surprises.
What Is Capital Gains Tax?
Capital gains tax refers to the tax that you pay on the gain that you get by selling an asset. This can be stocks, bonds, real estate (not including your primary residence) or other valuable property. When you sell an asset at a higher price than what you bought it for, the difference between the buying price and the selling price is termed a capital gain.
In Canada, half of your capital gain is taxed. This has the effect that should you earn a profit of $10,000 on the sale of shares, only half that amount, or 5000, will be included in your income for the year and will be taxed at your income tax rate.
When Do You Pay Canadian Capital Gains Tax?
You must report and pay Canadian capital gains tax upon disposing of or selling an asset that has gained you some money. The tax is computed in the year of sale of the asset and is payable at the time of filing a personal or business tax return.
In the event that you are a resident of Canada, the provisions will apply to all your assets, no matter the location. In the case of non-residents, Canadian tax will only be charged on some Canadian property, like real estate or shares in Canadian corporations.
Exemptions and Reductions
Exemptions may allow you to pay less or no capital gains tax. Such as the gain on the sale of your main home is usually tax-exempt. Moreover, you can offset your capital gains with capital losses arising out of your other investments to reduce the taxable value.
A lifetime capital gains exemption may also apply to certain qualified small business shares and farm or fishing properties. To report correctly, it is important to keep good records of the prices you purchased and sold the asset, as well as any other costs related to acquiring or disposing of the asset.
Conclusion
The Canadian system of capital gains tax is not very complicated once you get the hang of it. Maintaining good records and understanding the exemptions and deductions will help you to pay less tax and make better financial decisions. When in doubt, you can always talk to a tax expert to help you wade through the information and remain on the right side of the law.
