Area of Law: Tax Law
Answer # 171
Capital gains and losses, and capital gains exemptionsRegion: Ontario Answer # 171
What is a capital gain?
Generally, if you sell capital property, such as stocks on the stock market, for more than you paid, the amount of the difference is considered a capital gain. If you sell something for less than you paid, the amount of the loss is considered a capital loss.
What percentage of the gain is taxed?
If you have a capital gain, only 50% of it will be taxed. If you have capital losses, only 50% of the loss can be subtracted from any capital gains you made in that year. Capital losses can be carried back or carried forward. In some cases, capital gains can also be paid in a year other than the year in which they were earned. This is possible if you do not receive all of the proceeds of the sale right away. In such cases, you would claim a capital gains reserve, and pay only a portion of the tax each year. Reserves only can be claimed for a period up-to five years, which means that all tax owing must be paid by the fifth year.
Exemptions from capital gains tax
1. Property that is exempt
Principal residence: Some types of property are exempt from being taxed for capital gains. The most common capital gain exemption is the sale of your principal residence. A principal residence is the home where you ordinarily live or where your spouse, former spouse, or child ordinarily lives.
Although capital gains on the sale of a principal residence are not taxable, as of October 2016, Canada Revenue Agency requires that the seller report the sale in order to claim the exemption. You will be required to report information such as: the date of purchase, the date of sale, the selling price, and a description of the property.
Other types of property: Capital gains from the sale of business inventory, land bought with the intention of making a profit on its resale, and profit made on the sale of personal-use property whose cost and selling price were both less than $1,000 are some examples that fall under the capital gains exemption.
2. Lifetime capital gains exemption
The lifetime capital gains exemption (LCGE) allows people to realize tax-free capital gains, if the property disposed of qualifies.
The 2019 exemption limit was $866,912. The 2020 exemption limit is $883,384. The increased limit applies to all individuals, even those who have previously used the LCGE.
Property qualifying for the LCGE includes qualified small business corporation shares and qualified farm and fishing property. The LCGE for qualified farm and fishing properties (QFFP) disposed of after April 20, 2015, has effectively increased to $1 million as a result of an additional deduction.
Small business corporation shares qualify under this exemption when:
1. Throughout the 24 months immediately preceding the disposition of the shares:
- the shares have been owned by you or a person or partnership related to you, and
- more than 50% of the fair market value of the assets of the corporation were used in an active business, carried on primarily in Canada, and
2. At the time of the disposition of the shares “all or substantially all” (at least 90%) of the assets of the corporation were used to carry on active business.
You will need to determine your total capital gains and losses before filing your tax return. When you sell stocks or other investments through a broker, you will usually receive a receipt for tax return purposes that lists your capital gain or loss.
For general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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