Capital Gains and Losses are only realized upon the deposition of an asset, in real estate this is the final sale of the property. These gains or losses are calculated by looking at the Adjusted Cost Base (ACB) and subtracting it from the final sale price less any other fees associated with the sale.
Example of a Capital Gain:
- Year 1 you buy a property for $300,000
- After adding Welcome taxes and other fees (~$10,000), the Adjusted Cost Base (ACB) in year 1 is now $310,000
- Year 5 you decide to sell the property which ultimately closes at $350,000 and cost your $10,000 in fees to sell NETTING you $340,000.
- To work out capital gains you subtract the $340,000 from the ACB of $310,000 which it cost you to acquire the asset.
- You are now liable to pay tax on the $30,000 of Capital Gains the property has produced upon the act of deposition.
Capital Losses work in a similar manner, but can also be used to offset a Capital Loss in the past 3 years or carried forward in-defiantly to offset future Capital Gains.
How are Capital Gains Taxed?
Only 50% of the capital gain on any given sale is taxed at your marginal tax rate (which varies by province). On a capital gain of $30,000 in the example above, only half of that, or $15,000, would be subject to capital gains tax. For a Canadian in a 35% tax bracket for example, a $15,000 taxable capital gain would result in $5,250 taxes owing. The remaining $24,750 is the investors’ to keep as their take home profit after tax.
The exception to this is if you are selling your Primary Place of Residence (PPR), in which case none of the Capital Gains are subject to tax.