Understanding and Navigating Capital Gains Tax Changes in Canada

Capital Gains Tax Changes in Canada

Navigating the complexities of capital tax changes in Canada can be daunting for individuals and businesses alike. Understanding the intricacies of capital gains, how the tax is calculated, what qualifies as a capital gain or loss, and how a certified accountant can aid in this process is essential for making informed financial decisions. 

What is Capital Gains?

Capital gains refer to profit from the sale of assets, for example, real estate, stocks, bonds, or other investments. When you sell an asset for more than the price you paid for it, the difference is considered a capital gain. For example, if you purchase a stock for $2,000 and later sell it for $2,500, you have a capital gain of $500.

Capital gains are categorized into two types: realized and unrealized. A realized gain occurs when the asset is sold, whereas an unrealized gain is the increase in the asset’s value that has not yet been sold. Only realized gains are subject to capital gains tax.

What is changing?

The federal Liberals said they will increase the capital gains inclusion rate as of June 25th in order to make Canada’s system more fair, affluent individuals and corporations pay more taxes. The share of capital gains that is taxed will increase from 50 per cent to 67 percent. The change will apply to those with more than $250,000 in capital gains in a year as of June 25. All corporations and trusts will also have to pay taxes on a bigger portion of their gains.

How is Capital Gains Tax Calculated?

Capital gains are taxed at a lower rate than ordinary income in Canada. As of 2024, only 50% of the capital gain is subject to tax. This means if you have a capital gain of $1,000, only $500 is taxable.

To calculate the capital gains tax, follow these steps:

  1. Determine the Capital Gain: Subtract the original purchase price (the adjusted cost base) from the sale price of the asset.
  2. Calculate the Taxable Capital Gain: Multiply the capital gain by the inclusion rate (50%).
  3. Apply the Marginal Tax Rate: Multiply the taxable capital gain by your marginal tax rate to determine the amount of tax owed.

For example, if your marginal tax rate is 30% and you have a capital gain of $1,000, your taxable gain is $500. The tax owed would be $500 x 30% = $150.

capital gains tax changes in canada

What is a Capital Gain or Loss?

As mentioned above a capital gain occurs when an asset is sold for more than its purchase price. A capital loss occurs when an asset is sold for less than its purchase price. Capital losses can be used to offset capital gains, reducing the overall tax liability.

Assets that can generate capital gains or losses include:

  • Stocks and Bonds: Profits from selling shares or bonds.
  • Real Estate: Gains from selling property, excluding primary residences in certain conditions.
  • Collectibles and Personal Property: Sales of valuable items like artwork or jewelry.
  • Business Assets: Profits from selling business equipment or other assets.

Capital losses can be carried back up to three years or forward indefinitely to offset capital gains in other years, providing flexibility in managing tax liabilities.

How Can a Certified Accountant Help a Business Navigate Ontario’s New Capital Gains Tax?

The recent changes in capital gains tax rules in Ontario can significantly impact businesses. A certified accountant can provide invaluable assistance in several ways:

  1. Expert Advice: Accountants stay updated on tax laws and regulations, ensuring businesses comply with the latest requirements and benefit from available tax reliefs and incentives.
  2. Strategic Planning: Accountants can develop tax-efficient strategies for buying and selling assets, timing transactions to minimize tax liabilities, and maximizing after-tax profits.
  3. Record Keeping: Proper documentation of transactions is crucial for accurately calculating capital gains and losses. Accountants can manage and maintain these records, ensuring all necessary information is available for tax reporting.
  4. Tax Filing and Reporting: Accountants can prepare and file tax returns, ensuring accuracy and compliance with tax laws. They can also represent businesses in case of audits or disputes with tax authorities.
  5. Financial Analysis: Understanding the broader financial impact of capital gains tax changes is essential for long-term planning. Accountants can provide insights and analysis to help businesses make informed decisions.

In conclusion, navigating capital tax changes in Canada requires a clear understanding of capital gains, how the tax is calculated, what qualifies as a gain or loss, and the expertise of a certified accountant. By leveraging professional advice and strategic planning, businesses can manage their tax obligations effectively and optimize their financial results.

AMI CPA Professional Corporation is a full-service accounting firm offering a broad range of accounting services to meet the needs of businesses, entrepreneurs, and individuals in Oakville & the GTA.