ORIGINALLY PUBLISHED May 27, 2019
5 Things to Know About Capital Gains
Archived educational article, adapted for clarity. This is not current tax advice. Confirm the rules applicable to your transaction with a qualified tax professional.
Understanding capital gains
A capital gain generally arises when a capital asset is disposed of for more than its adjusted cost base and eligible selling expenses. Assets can include investments and real estate. An increase in market value alone does not necessarily create an immediate tax bill. Exemptions, deemed dispositions and other rules can affect the result.
1. Understand how a gain is taxed
The original 2019 article described a 50% inclusion rate. That is historical context, not a statement of the rate applicable to every future transaction. The taxable portion of a gain and the tax payable depend on the rules in force and your circumstances. A qualifying principal residence may receive different treatment. Confirm the applicable rules before estimating tax.
2. Keep good records
Keep purchase and sale documents, acquisition dates, commissions, legal costs and records of qualifying improvements. The information needed to calculate a gain may be spread across several documents. Maintaining an organized record makes it easier for your tax adviser to calculate and report the transaction correctly.
3. Understand gifts and below-market transfers
Giving away a property or selling it below market value does not necessarily avoid tax. Fair market value rules may apply, and the outcome can differ for the person transferring the asset and the recipient. Transfers involving spouses or common-law partners have special rules. Get advice before arranging a gift or discounted transfer.
4. Plan before you sell
Discuss a planned sale with your tax adviser early. The timing of a disposition, available capital losses and your other income can affect the outcome. Loss claims and transfers can be subject to restrictions, so do not assume that selling a losing investment will automatically offset a particular gain.
5. Consider assets beyond real estate
Capital gains can arise from investments as well as property. Review all relevant dispositions when preparing your return. Keeping a complete picture of your assets, costs and transactions can help avoid surprises at filing time.
Get advice for your circumstances
The original article recommended professional tax advice. That remains especially relevant for property transactions, where use of the property, ownership history and available exemptions can change the result.