Capital gains is one of the most common causes of stress when it comes to tax, but the tax amount payable is often not as bad as anticipated.
Basic Principles
A capital gain is when you sell an asset such as a house or an investment for more than you bought it for. Then 50% of this amount is included in the calculation of net income and taxed at the normal tax rate.
Example:
I bought shares for $100 and sold them for $150, resulting in a gain of $50. The portion of the gain that is subject to tax is $50* 50% = $25. Then this taxable amount is multiplied by the tax rate $25*15% = $3.75.
Capital gains can also be split when you have shared ownership of an asset. For example, a couple who sells a rental property will split the capital gains 50/50. Expenses such as legal or real estate fees can be deducted off the taxable capital gains amount.
The complexity of capital gains tends to stem from the rules around Adjusted Cost Base (ACB) and Principal Residence Exemption.
Adjusted Cost Base
In simplified terms, the adjusted cost base is a revised and more current value of your asset. This reduces the taxable gain amount.
There are several ways to calculate an adjusted cost base. For an inherited property for example, you would set the ACB as the value of the property at the date of inheritance. For a rental property, you could add the costs of renovations to the original price you bought the property for.
The calculation of the ACB and best practice can be complex. We recommend discussing your specific situation with your accountant.
Principal Residence Exemption
The Principal Residence Exemption is an exemption from capital gains tax for your property that you live in most of the time you have owned it. In most cases this would be a family home.
You can only have one property designated as your principal residence at a time, however if you own more than one property you can also split the exemption.
For example, if you own a home in both Nova Scotia and Ontario from 2010 to 2025. The Nova Scotia home could be allocated as the principal residence in 2010-2020 and Ontario for 2021-2025. In this scenario, if you sold the Nova Scotia home you would only pay a proportion of the capital gains tax for 5 out of the 15 years you owned it/the time it was not designated as your Principal Residence.
In all scenarios, the sale of a property must still be recorded on your tax return, even if it is 100% exempt from capital gains.
Losses on the sale of an asset are not tax deductible, but they can be offset against any gains in the current year or carried forward to use against any future gains.
