Capital Gains Taxation in Canada
In Canada, capital gains are subject to taxation under the Income Tax Act. Capital gains are defined as the profit realized from the sale or disposal of capital property, which includes:
- Real estate
- Stocks and bonds
- Mutual funds
- Businesses
Calculating Taxable Capital Gains
To calculate taxable capital gains, the following formula is used:
Capital Gain = Proceeds of Disposition - Adjusted Cost Base
The adjusted cost base is the original cost of the asset plus any expenses incurred in acquiring it, such as brokerage fees or legal fees. It also includes any capital improvements made to the asset during ownership.
Tax Rates
Capital gains are taxed at a rate of 50% of the taxpayer's marginal income tax rate. This means that if your marginal tax rate is 30%, you will pay 15% in capital gains tax.
Exemptions and Deferrals
There are a number of exemptions and deferrals available for capital gains in Canada. These include:
- The principal residence exemption: This exemption allows homeowners to avoid paying capital gains tax on the sale of their primary residence.
- The lifetime capital gains exemption: This exemption allows individuals to claim a lifetime exemption of $892,218 (as of 2023) on capital gains from the sale of qualified small business shares.
- The inter-spousal rollover: This rollover allows spouses to transfer capital property between each other without triggering a capital gain.
Legal Framework
The taxation of capital gains in Canada is governed by the following provisions of the Income Tax Act:
- Section 3: Definitions
- Section 4: Chargeable income
- Section 40: Capital gains
- Section 41: Adjusted cost base
- Section 42: Exemptions and deferrals
Policy Objectives
The policy objectives of the capital gains tax system in Canada are to:
- Raise revenue for the government
- Encourage investment and economic growth
- Ensure that individuals and businesses pay their fair share of tax
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