Capital Gains Tax: Better Understanding and Planning

You might have to pay capital gains tax if you recently made money from the sale of an investment. When assets like stocks, bonds, precious metals, real estate, or other property are sold or presumed to be sold and are subject to capital gains tax, capital gains or losses are realized in Canada.

Capital Gains: what are they?

A capital gain occurs when you sell an asset that you own as capital property and that is held in a non-registered account for more than you paid for it.

Finding the asset’s adjusted cost base (ACB) is the first step in calculating capital gains. The asset’s purchase price plus any other expenses, such as commissions or legal fees, is known as the ACB. Simply deduct your ACB from the selling amount, together with any costs or expenditures related to the asset’s sale. Your capital gain is any profit that remains.

Reducing the Capital Gains Tax

Make use of tax-sheltered or tax-free accounts

Capital gains tax Canada can be avoided with the aid of a tax-free savings account or TFSA. Even after a gain is achieved, the income you receive from the majority of investments in a TFSA is not subject to taxes. Additionally, money taken out of a TFSA is typically not subject to taxes. Dividend income from American and foreign firms is a significant exception, as it may be liable to withholding tax. Please be aware that TFSAs have an annual contribution cap, and that if you exceed that cap, you will be taxed on the excess each month.

Harvesting tax losses

In Canada, you might be allowed to use net capital losses to offset taxable capital gains. This is called tax loss harvesting, and it lowers your overall tax burden. Any realized capital gains could be partially or entirely negated by lower-performing funds in a portfolio that produce a capital loss.

Keep note of costs

It can be beneficial to record any qualifying costs, such as management or legal fees that you incur when obtaining or retaining investments, as these could affect the adjusted cost basis (ACB) of your holdings. When some assets are sold or deemed sold for more than their ACB, capital gains tax is computed.

Income from capital gains indicates that your investments are increasing in value. To achieve the optimum tax outcome, however, careful planning is necessary.