Definition:
Assets that last longer or are held for a longer period, such as stocks, machines and buildings, are called capital assets. When you sell your capital asset, there will either be a capital loss or a capital gain. Let's hope it's a gain! Capital gain occurs when a taxpayer sells assets for more than their cost, and a capital loss occurs when they are sold for less than their cost. It is important to report capital assets as they affect your tax calculations. There are many different types of capital assets such as stocks, bonds, mutual funds, and ETFs held in non-registered investment accounts. There might be other types of capital assets held outside of a financial institution such as an investment or rental property.
Tax treatments:
Capital gains are subject to tax treatment that is different, and more favourable, than the treatment of other types of income. Only a portion of capital gain is taxable; the inclusion rate or taxable rate is 50% for 2021, and has been 50% for many years now. Capital gains are reported on the tax return when they are realized.
The destructibility of capital losses are subject to numerous restrictions. Capital losses are deductible only against capital gains. Allowable capital losses (after inclusion rate) can be carried forward indefinitely, and carried back for three years.
Capital gain realized on the disposition of a principal residence is neither taxable nor is any loss deductible.
Example: Tim bought 100 shares of Bank of Montreal at $25 per share in 2010 for a total of $2,500. He sold all of his BMO shares in 2021 at $150 per share for a total of $15,000. His profit ( i.e., capital gains) from the sale is $12,500. Tim’s taxable gains would then be $6,250 (½ the inclusion rate of $12,500 capital gains in 2021).
Everyone will pay a different amount in personal income tax for their taxable gains. Their tax owing will depend on what other types of income they have for the year, and what tax bracket they fall under.
Tax optimization:
If you have made smart investment decisions don’t be worried about your tax bill from the capital gains. There are many optimization opportunities for you to manage the tax bill, such as contributing into your RRSP. Read our blog on RRSPs for more information. Another method of optimizing your tax on capital gains would be to crystallize your capital losses by selling your underperforming stocks (investments), that are trading below their original cost.
Example: Tim has other sources of income for the year in the amount of $150,000 and he is concerned that he will pay most of his profits in taxes from the sale of his BMO shares. In order to offset the gains, Tim decides to sell some of his underperforming stocks that he purchased for $15,000 and are currently worth $2,500. By selling the shares, he creates a $12,500 capital loss, and for tax purposes, an allowable loss of $6,250 ( ½ the inclusion rate of $12,500 capital loss * in 2021). Tim can offset all his capital gains with his capital losses.
Talk to your financial advisor or Softron to see if you can benefit from capital losses. And don’t forget that you would need to sell your underperforming stocks before the year end!
Limitation of crystallizing your losses:
When selling your underperforming stocks, be aware of the CRA’s tax avoidance rule called “superficial loss rules”. When you sell and trigger a capital loss, you cannot repurchase the identical security within 30 days of selling it. For example, you cannot deduct the capital loss if you sold the securities on December 20th, and immediately repurchased them on January 5th of the following year. The CRA will consider that the purpose of this transaction was to create a capital loss for the benefit of saving income tax, and therefore it will not accept the sale.
Circumstances and situations will vary from individual to individual. As the saying goes, one size doesn’t fit all! It is very important to contact your Softron advisor, or your nearest Softron office, for a consultation to see if you can benefit from crystallizing your capital losses.
Note: There are no capital gains or capital losses for registered accounts such as TFSAs, and RRSPs. These are tax sheltered accounts and have different tax treatments than non-registered accounts held at a financial institution, or an investment firm like Questrade.
Posted on 24 Nov 2021