Capital gains are an important concept in personal finance and taxation, particularly for individuals and businesses involved in buying and selling assets. In Canada, understanding capital gains is crucial for accurately reporting income on your tax return. Here's a breakdown of what capital gains are, how they are calculated, and their implications.
What is a Capital Gain?
A capital gain occurs when you sell a capital property for more than its adjusted cost base (ACB) plus any selling expenses. Essentially, if you buy an asset—like real estate, stocks, or bonds—and then sell it for a higher price, the profit you make is considered a capital gain.
Key Definitions
- Capital Property: This includes assets like real estate, stocks, bonds, and equipment used for business purposes. It does not include inventory or assets used in a business's regular operations.
- Adjusted Cost Base (ACB): This is the original purchase price of the asset, adjusted for any expenses related to buying it, such as commissions or legal fees.
- Proceeds of Disposition: This is the amount you receive when you sell the asset, minus any selling expenses.
Calculating Capital Gains
To calculate your capital gain, you can use the following formula:
$$ \text{Capital Gain} = \text{Proceeds of Disposition} - (\text{Adjusted Cost Base} + \text{Selling Expenses}) $$
For example, if you sold a property for $300,000, your ACB was $200,000, and you incurred $5,000 in selling expenses, your capital gain would be:
$$ \text{Capital Gain} = 300,000 - (200,000 + 5,000) = 95,000 $$
This means you made a capital gain of $95,000 on the sale of that property[1][2][3].