When making financial transactions most investors forget about the "Capital Gains tax". Most financial transactions are subjected to Capital gains taxation when you sell or are considered to have sold capital property. So what are some examples or cases where you are considered to have sold Capital property?
- You exchange one taxable property for another
- You sell your property for non-cash i.e. a gift
- Shares or other securities in your name
- You settle a debt owed to you
- You transfer certain property to a trust
- Your property is expropriated (government takes it over)
- Your property is stolen/destroyed
- A Corporation redeems or cancels shares (T5 slip)
- You leave Canada permanently
- The owner dies.
If any of these above situations apply to you then you would have to declare them on your personal T1 Tax filing (line 174 for the curious people).
There is an exemption on your principal home being the house you live in. When you sell your principal home and move to another home the gain on such a transaction is free of capital gains to the maximum of $813,600 lifetime exemption (line 254). In fact, up until Oct 2016 you didn't even have to declare any of these transactions on the T1 Tax returns. The Minister of Finance declared that a major change to the principal home exemption will be that all such sales will need to be reported on all Tax returns effective November 2016. Why these rule changes you might be wondering? Perhaps the CRA are trying to limit the house flippers in the market or maybe it's because too many people are misusing or not paying the capital gains on these property dispositions. #TaxLoopHoles
To fully understand the capital gains taxation, we have to look at the adjusted cost base. The adjusted cost base (ACB) is essentially the total cost of buying the property plus any expenses on disposition. Once you have the ACB what you can do now is take the total sale price ($100) minus the cost ($80) gives a total profit of $20. This profit of $20 will be 50% exempt from capital gains tax but the other 50% will be taxable. The $10 profit realized will be taxed at 35% which would raise a capital gains tax of $3.50. #Simple
There are certain rules in the tax act which are "special" in nature and can truly work in your favour. One such special rule is identical property rules or better known as replacement property rules. Let's think of a golf course and owner John bought this property in 1988 and sells it now in 2016. Now evidently, the price paid for such a golf course in 1988 would have had a smaller ACB resulting in a higher capital gain. Identical replacement property rules allow for the capital gains tax to be deferred by replacing the property with another golf course. This golf course can be anywhere within Canada and in many such cases, it's cheaper to buy another replacement property than it is to pay the capital gains tax.
It might be beneficial for you to speak to your accountant to time your financial transaction to ensure you are not hit with a Capital Gain tax. A great CRA resource to check out is the following below link.