What are capital positive factors?

You have got a capital acquire once you promote an asset or funding for greater than it price you to accumulate it. In case you bought $100 price of inventory after which bought these shares for $150 two years later, for instance, you’ll have a capital acquire of $50. Alternatively, once you promote an asset for lower than its authentic buy value, that’s known as a capital loss.

Capital positive factors and losses can happen with many varieties of investments and property, together with shares, bonds, shares in mutual funds and exchange-traded funds (ETFs), rental properties, cottages and enterprise property. Capital positive factors usually don’t apply to some varieties of personal-use property, similar to automobiles and boats, whose worth tends to lower over time. Additionally they don’t apply to the property you reside in—your principal residence.

Capital positive factors are taxable in Canada. The worth of a capital acquire is handled as revenue earned throughout the tax yr through which it was realized. There are, nonetheless, necessary exceptions to those guidelines, which we’ll run by way of under.

Watch: Capital positive factors tax, defined

What’s the capital positive factors tax charge in Canada?

Many Canadians mistakenly consider that the whole capital acquire is taxed at a charge of fifty%. In truth, solely 50% of a capital acquire is taxable, and the speed is dependent upon the place you fall inside the federal and provincial revenue tax brackets within the yr you report the acquire. The acquire is added to your taxable revenue. There’s no single “capital positive factors tax charge” in Canada, as a result of the speed is dependent upon how a lot you earn. The upper your whole revenue (together with employment) is for the yr, the extra tax you possibly can count on to owe on a capital acquire.

Additionally necessary to know: A capital acquire is taxed solely as soon as it’s “realized,” which means the asset has been bought. So long as the acquire is “unrealized,” which means the asset’s worth has elevated on paper however the asset stays in your possession, you should not have to pay taxes on it.

Let’s say you notice a capital acquire of $50,000 this yr. Half of that quantity ($25,000) have to be reported as revenue in your tax return once you file subsequent yr. In case you fall in a 33% marginal tax bracket—the very best federal tax charge in 2023—the extra $25,000 in revenue leads to $8,250 in taxes owing. The remaining $41,750 is yours to maintain. And when you fall inside a 26% marginal tax bracket, the identical capital acquire leads to $6,500 in taxes owing—which means you retain $43,500. 

With the tax charges we presently have in Canada, and the truth that solely half of a capital acquire have to be reported as revenue, nobody is paying greater than 27% in capital positive factors tax. Most individuals pay a lot much less. 

Methods to calculate capital positive factors and losses

You possibly can calculate whether or not you have got a capital acquire or loss by subtracting the asset’s web price of acquisition from the online proceeds of its sale.