With tax season in full swing; there are always lots of questions around investment income and how to report it, here are some frequently asked questions on Capital Gains:
What is a capital gain (or loss) on an investment?
In simple terms, a capital gain or loss is the difference between the purchase price and the sale price of an investment. If you sell the investment for more than what you bought it for, it is considered a capital gain, if the value is less than what you bought it for it is a capital loss.
What are the tax implications of capital gains or losses?
If you sell an investment and end up with a resulting capital gain, (you made money), you have to pay taxes on that capital gain. Currently you include half (50%) of the gain in your income and pay tax at your marginal tax rate. If you have lost money; you have a capital loss; a capital loss can be written off against your capital gains to reduce the amount of tax you owe on the money you made. Capital losses can only be used to reduce your capital gains, but you can carry them back three years to offset previous taxes paid, or carry them forward indefinitely to offset future capital gains.
How do you calculate a capital gain or loss?
Three pieces of information are required to report a capital gain/loss:
- Proceeds: The selling price of the investments
- Costs incurred on the sale: typically commission on the sale
- Adjusted Cost Base (ACB): This is the cost of the investment (or asset), plus costs such as commission on purchase
To arrive at your capital gain amount, you subtract the adjusted cost base and the costs incurred on the sale of the investment from the proceeds.
Mutual Fund Capital Gains
You may also need to report capital gains from mutual funds even if you don’t sell them. When the fund managers sell investments held within a mutual fund they can trigger capital gains and losses. You, the investor will receive your portion of these gains or losses based on how many units or shares of the fund you own. You will receive a tax slip from the Fund Company outlining these capital gains or losses – a T3 or a T5008; these amounts should be reported on schedule 3 of your tax return. The positive side is that these capital gains will increase your ACB and therefore reduce your capital gains when you sell the investment in the future.
Transfers In-kind to an RRSP
Sometimes we transfer investments into our RRSPs to create our contribution receipt, however keep in mind if the investment is in a capital gain position you will have to pay tax on the gain – same as if you sold the investment outright. Unfortunately, a transfer of an investment in a loss position will not create a useable capital loss to be used in the future.
Switches within a Mutual Fund company’s funds
Most of us have switched investments within the same company’s funds to take advantage of changing market conditions. Although no cash changes hands for most non-registered accounts this is considered a sell and a buy and the capital gains or losses must be reported.
Superficial Losses
The CRA does not want people to be artificially creating capital losses for themselves to be used to offset capital gains. Briefly, the superficial loss rule states that if an investment is sold at a loss and repurchased by the taxpayer (or their spouse) within 30 days, the loss will not be allowed for tax purposes.
For more information on your capital gains or losses and how to report them, talk to your accountant or give me a call.
Have a great weekend!
Tracey
Source: Dynamic Funds