Capital Gains Tax

Capital Gains and losses can only be triggered when a taxpayer disposes of a capital asset. The effective inclusion rate is 1/2 in Canada for capital gains and capital taxes. Taking the proceeds from disposition and subtracting it from disposition expenses will give you the sum of the capital gain/loss (negative or positive determines gain or loss).

Example: You bought 10 shares of XYZ at $10.00 per share ($100 total). The shares than increased in price to $30.00 and you decide to sell, leaving you with $300 cash in your account. Proceeds from disposition equals $300, while disposition expenses (original cost) is $100. You now take 300 -100 = 200 in capital gain. The 1/2 inclusion rate now comes into play, you divide the capital gain by 2. Therefor 200 / 2 = 100 is your taxable capital gain.

Simple ways to avoid capital gains tax is to hold assets inside a TFSA. Another way to avoid paying to tax is to avoid selling, this is because taxes are only triggered on the “back end” when selling, not at the point of purchase. Although capital losses may be beneficial as it becomes a credit towards future gains, it is never pleasant to lose money on an investment. Planning for effective tax rates and best possible taxation scenarios is a great way to start off on the right foot. Commissions and tax can eat away a lot of gains if they are not properly managed.

In general, when capital assets are transferred, they are not considered to involve a disposition unless the beneficial ownership changes. An example would be if an asset is transferred from one trust to another, but both are owned by the same beneficial owner. One exception to this is when there is a transfer to an RRSP.


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