Five things to know about capital gains
Posted December 10th 2014
Capital gains are a complicated topic at the best of times, but failing to report them on your tax return can be costly. If you are trying to figure out if you have a capital gain this year, here are five big things to know about them.
What is a capital gain? Essentially, a capital gain is the appreciation value of a capital property, between when it is sold and the date of purchase. Let’s say, for instance, that you bought a stock for $10 and sold it for $15. The difference of $5 would be your capital gain.
How are capital gains taxed? If you have any capital gains on any properties, 50% of that gain is taxable. The amount is added to your income, and then your personal tax rate is applied to that total, so the amount of tax you pay on a capital gain depends on your annual income. The higher your tax bracket, the more tax you will pay on your capital gains.
Proper recordkeeping is crucial: When declaring capital gains, you must have documents related to the acquisitions and dispositions, including the date of acquisition, purchase price, commissions and any other relevant expenses. Unfortunately, this information will rarely, if ever, be included in the same document which means that, for multiple properties, you’ll have a fair number of documents to keep track of. Make sure to track all your paperwork as soon as you make a purchase, because you don’t want to be scrambling to find it on April 30.
Sale or gift? A property does not necessarily need to be sold to realize a capital gain. They can also be realized and considered to have been disposed of if you give it away. This means that the act of giving away a capital property at a cut-rate price or simply as a gift, may not work out the way you expect it to for tax purposes. Essentially, if you give a property to someone else, you’re deemed to have sold it. If you give it away at a low price, the CRA will use the Fair Market Value (FMV) of the property to determine whether or not you’ve realized a capital gain. If a property is given away as a gift, the recipient’s cost is bumped to the FMV; the donor’s capital gain or loss depends on the FMV of the property. Gifts between spouses, however, are usually tax-free.
Plan for your gain: Depending on the size of your capital gain, it can create a bite at tax time. If you know you are selling a property that will create a capital gain during the tax year, try to take steps to minimize your tax liability. You may want to sell some losing stock to create a capital loss that can help reduce your gain. Or, if your income fluctuates, you may want to claim a capital gain in a year when your income is lower than usual.
Realizing a capital gain on your tax return is a good problem to have, since it means you have earned income on your investment. Just make sure you understand how it will impact your tax return and your tax liability. You do not want to be facing an unexpected tax bill next year when you file.
At H&R Block, we believe our clients are entitled to the highest level of service. Our tax advisors are some of the best in the business, and are here to help you with any tax situation you might have. It’s our guarantee.
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