Demystifying Capital Gains exemptions
I find that some of my clients are confused about the concept of Capital gains exemptions, They can’t fathom why they don’t have to pay taxes when they have sole their incorporations and made a substantial gain. Well let’s explain it so there is no room for confusion.
What qualifies as capital? Most common capitals are shares, investments, clients’ lists, and properties.
What is a capital gain or loss? When an asset is sold over the historic/book value (what you actually paid for, Adjusted Cost Base (ACB)) the surplus is called capital gain. Half of that gain taxable in Canada. This amount has fluctuated in the past years.
Here is an example:
You bought shares in company “Orange” 2010 for $100 and you sold them in 2015 for $200. In the year that you sold them we have triggered a capital gain. What is the amount?
Proceeds – ACB therefore 200 – 100 = 100 half is taxable 100*50%=$50
This $50 will be added to the rest of your income in 2015.
Please note; this will get complicated when let’s say you bought “orange” for 3 years
2010 at 100 per share sold some at $120
2011 at 80 per share sold some at $50
2012 at 110 per share sold some at $120
Always keep a record, I setup a schedule in excel spreadsheet and call it “continuity Schedule” so I can keep track of these stocks for my clients.
Of Course the reverse works as well, when shares are sold less than the ACB.
You bought shares in company “Orange” 2010 for $220 and you sold them in 2015 for $200. In the year that you sold them we have triggered a capital loss. What is the amount?
Proceeds – ACB therefore 200 – 220 = -20 half is capital loss 20*50%=-$25
It will only be used if you have a capital gain in that year or in the past.
So now what is the capital gain exemption? Basically, you don’t have to pay the tax on the gain if you sold small active business corporation shares, farm property, and fishing property. So what doesn’t it mean small active business corporation shares? Well let’s say you had incorporated your practice or you small business and selling your shares now.
Be careful sale the shares and not the assets of your corporation if you want to use this.
Example; your shares were $100 and you sold them now for $250,000
$250,000 – $100 = $249,900 and let’s assume you haven’t used any exemptions.
Your taxable amount = $0
If you had sold the assets, you would have had to pay taxes on
250,000 – assets costs =
Simple right? Not clear enough, please call or email us at [email protected] 613 -266 7013
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