What is Capital Gain?
Any increase in the value of a capital asset is a capital gain (when comparing the current value to its original purchase price). However, it is only considered to have occurred or ‘realized’ when the asset is sold – an important distinction when compared to an increase in an asset’s value while you still hold it (paper gains).
By contrast, a capital loss happens when there is a decrease in asset value vis-à-vis the original purchase price
A capital gain may be long-term (more than 1 year) or short-term (less than 1 year) and must be claimed on income taxes.
Capital Gains on Property
Some of the situations which are categorized by CRA as ‘selling of property are:
- You exchange one property for another (property swap)
- You transfer certain property to a trust
- Your property is expropriated – i.e. taken over by the government
- Your property is stolen or destroyed
- You give property (non-cash) as a gift to someone
- Shares, stocks, or other securities held in your name are converted
- You cancel or settle a debt owed by someone to you
- An option to buy or sell property expires
- You leave Canada (see Dispositions of property)
- The owner dies and the property passes on to successors/heirs
By and large, most people are not affected by the capital gains rules because the property they own is for their personal use or enjoyment.
When you sell personal-use property, such as a car, in most cases you do not end up with a capital gain, simply because these assets lose value over time. As a result, you may end up with a loss on the sale.
As a rule, you have to report any gain on the sale of personal-use property; however, you are not allowed to claim any losses.
For more information, see Personal-use property (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html#P941_72799)
Capital Gains on Principal Residence (real property)
If you sell your home for more than what it cost, you result in again. However, you usually do not have to pay tax on any gains if all the following conditions are met:
- Your home was your principal residence for all years of ownership or for all years owned except one year.
- Neither you nor a family member designated any other property as a principal residence while you owned your home.
- The sale of the property has been reported, and it is designated as your principal residence on Schedule 3 and complete Form T2091(IND).
If you sold your home in 2020, the sale must be reported on Schedule 3, Capital Gains (or Losses) in 2020 and Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).
For more information, see Principal residence (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html#P4266_152355).
When Should a Capital Gain or Loss Be Reported?
The disposal of property should be reported in the calendar year (January to December) during which it was disposed.
Whether or not the sale of a capital property results in a capital gain or loss (and even if you do not have to pay tax), you still have to report the transaction and file an income tax and benefit return.
If you own a business with a fiscal year-end other than December 31, the sale of the capital property will be reported in the calendar year the sale takes place.
If you are in a partnership, it may be that the partnership fiscal year ends on a date other than December 31st. If the partnership sells the capital property during its fiscal year, you will report your share of any capital gain or loss in the calendar year in which that fiscal year ends. For example, you sold the property in April 2020, and your partnership fiscal year ends February – then you will report the sale in 2021 because that’s when the fiscal year ends.
How to Calculate Capital Gain or Loss
To calculate any capital gain or loss, you need to have ready the following 3 amounts:
- The proceeds of sale from the disposal of property
- The Adjusted Cost Base (ACB) i.e. the base price
- Any outlays or expenses incurred to sell your property. Please note that these are not running/maintenance expenses, rather the expenses incurred during the sale process.
Capital Gain (or Loss) = Proceeds from Sale – (ACB + Sales Expenses Incurred)
There may be a situation where the property was bought, maintained, and sold in a foreign currency. In that case, the following steps are necessary:
- Convert the sales proceeds to Canadian Dollars using the exchange rate applicable at the time of sale
- Convert the Adjusted Cost Base (ACB) of the property to Canadian Dollars with the exchange rate applicable at the time of purchase
- Convert the selling expenses to Canadian Dollars using the exchange rate that applies at the time the expenses were incurred
The formula for Capital Gain or Loss will still be the same.
You have a capital gain if you have sold, or are considered to have sold, a property with the proceeds being more than the total of the ACB and the outlays and expenses (incurred to sell the property).
Note: The CRA allows for 50% of the capital gain as being taxable. So if the Capital Gain is 40,000 Canadian Dollars, only 20,000 (50% of 40,000) will be part of taxable income on your return.
If you sell or are considered to have sold, a capital property with the sales proceeds being less than the ACB plus the outlays and expenses (incurred to sell the property), you have a capital loss.
Note: Like Capital Gain, the CRA only allows 50% of capital loss to ONLY be used to reduce or eliminate other taxable capital gains (in the case of multiple asset disposals) in the same tax period. The exception to this rule in the year of a taxpayer’s death or the immediately preceding tax year, when it can be used to reduce other income.
With any of the above situations, we at Taxvisors are here to help and guide you in every way we can, so that your tax reporting is expertly managed and submitted on time.
We have been providing complete Personal/Corporate Tax, bookkeeping, and accounting services to Mississauga and The Greater Toronto Area for over 20 years – and can deal with Canada Revenue Agency (CRA) to provide resolution for Tax Reporting, Filing, Reviews, Compliance Checks, and Audits & Appeals.