When you make capital gains from a capital property sale in British Columbia, you are required to pay taxes on your gains to the provincial government and the Federal government.
First, it is important to understand what capital property is. Capital property is any asset you purchase to earn income or for investment purposes.
Common capital property includes real estate property, stocks, bonds, exchange-traded funds (ETFs), and other investment assets.
Calculating Capital Gains in British Columbia
You make capital gains when you sell your capital property for a higher value than the adjusted cost base. Therefore, you must determine your asset’s adjusted cost base (ACB) to calculate capital gains.
Your capital property’s adjusted cost base is the amount you purchased the asset for, plus additional costs you incur to purchase the asset. For example, if you purchased stocks of $1,000 and paid $100 commission fees, your adjusted cost base is $1,100.
Major capital expenditures for renovating and improving real estate property may also count as an addition to the adjusted cost base.
Capital gains arise when there is a deemed sale of the asset. A deemed sale may be an actual sale to another party at an arm’s length transaction or a transfer of assets to another party. If the value of your property or investment asset increases in your possession, it is an unrealized gain. The Canada Revenue Agency will not tax an asset’s fair market value (FMV) increase if you have not sold or disposed of the asset.
The CRA taxes half of your net capital gains. If your capital gains are $1,000, only $500 is subject to taxes in British Columbia and Canada-wide. The British Columbia provincial government will tax your capital gains at your marginal income tax. Remember, you also pay the Federal taxes on your capital gains using the Federal tax brackets.
Suppose you sell your stocks with a $1,100 adjusted cost base for $1,500; you will receive a $400 capital gain. The CRA will tax only $200, 50 percent of this gain.
Use Schedule 3, Capital Gains (or Losses) to determine your capital gains or losses.
Capital Gains Reserve
A capital reserve happens when you receive installment payments for the sale of a property. With a capital reserve, you can defer part of your capital gains. This way, you report only capital gains to the extent of the proceeds you received from an asset sale in the year and the maximum claimable reserve.
Generally, you can claim a capital gains reserve for up to 4 years. If you transfer farm or fishing property or investment to your eligible child, the maximum capital gains reserve period is 9 years.
Use Form T2017, Summary of Reserves on Dispositions of Capital Property, to deduct a capital reserve in any year. The form explains how to calculate the maximum amount you can deduct as a reserve for a given year and the number of years for which you can claim the reserve.
You do not have to claim the maximum reserve in a given year. If you claimed a capital gains reserve in the prior year, you must include the reserve in your current year’s capital gains calculation. The capital gains reserve you claim in the current year cannot surpass the reserve you claimed in the previous year.
You may not be eligible for a capital gains reserve if you were not a resident of Canada at the end of the tax year or at any time in the following year or if the corporation you sold your capital property to is one that you control in any way. Additionally, you cannot claim the capital gains reserve if you were exempt from paying tax at the end of the tax year or at any time in the following year.
To ensure an effective capital gains reserve claim, consult a Chartered Professional Accountant and tax expert.
Capital Gains Deduction in British Columbia
Using the capital gains deduction, you can also reduce your capital gains for tax purposes. The capital gains deduction only applies to certain types of properties.
As of the 2022 tax year, you can only claim capital gains deduction on the following:
- dispositions of qualified small business corporation shares (QSBCS)
- dispositions of qualified farm or fishing property (QFFP)
- a carried forward reserve from either of the above
You must be a resident of Canada throughout the applicable tax year to qualify for the capital gains deduction.
A lifetime capital gains exemption (LCGE) limits the capital gains deduction you can claim in British Columbia.
As of 2022, the lifetime capital gains exemption for the disposition of qualified small business corporation shares (QSBCS) is $913,630. The cumulative capital gains deduction is half of this amount at $456,815, given that capital gains tax only applies to half of your capital gains.
The lifetime capital gains exemption for qualified farm or fishing property (QFFP) is $1,000,000. Similar to the rules for the disposition of qualified small business corporation shares, the cumulative capital gains deduction is $500,000, which is half of $1,000,000.
You can claim capital gains deduction using Form T657, Calculation of Capital Gains Deduction. You may also need to submit Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2022, if you have investment income or investment expenses in any year from 1988 to 2022.
Reducing Your Capital Gains Tax
In addition to reducing your capital gains by claiming the capital gains reserve and the capital gains deduction, you can reduce your capital gains tax by investing in registered accounts such as the tax-free savings account (TFSA). Your investment income and capital gains in the TFSA are not subject to taxes.
Capital gains in the registered retirement savings plan (RRSP) are tax-deferred. You pay taxes on your gains when you withdraw from your RRSP.
You can also minimize capital gains tax by claiming capital losses. If your capital losses exceed your capital gains in a tax year, this results in a net capital loss. Generally, you can use net capital losses to reduce taxable capital gains of the 3 preceding years and to any future years.
For example, if you have a net capital loss in 2023, you can apply your net capital loss to 2022, 2021, and 2020 to reduce your taxable capital gains in any of those years.
To file income taxes and report your capital gains, contact DW & Associates Chartered Professional Accountants to simplify your capital gains tax and help you claim capital gains tax deductions and net losses.