Capital gains tax in Ontario

A lot of people who are residents of Canada tend to overlook capital gains tax when it comes to filing their income tax. If you live in Ontario, Canada and don’t want to make this mistake, then this is an informative article for you. Learn all about capital gains tax in Ontario and how you can file it.

How does capital gains tax work in Ontario?

Capital gains occur when the value of an asset increases, resulting in the growth of your invested capital. Since this increase represents a form of income, it is subject to capital gains tax in Ontario. The tax is triggered when the capital gain is ‘realized’. This means when you have sold or traded an investment converting the gained capital into cash. At this stage, when the capital gains tax is solidified and you have the proceeds in your possession, you need to pay the capital gains tax in Ontario. As residents of Ontario, you should be aware of this tax obligation and need to fulfil it accordingly when realizing capital gains from your investments.

The taxable capital gain is calculated as 50% of the actual capital gain amount. This means that only half of the capital gain is considered taxable income for tax purposes.

In Ontario you are not required to pay capital gains tax if the gains remain unrealized. This means that if you have not sold off your investment and have not gained the capital resulting from an increase in its value, you do not incur capital gains tax.

However, if you have sold a property and earned a profit, or if you have experienced gains from trading stocks, it is highly likely that capital gains tax will play a significant role in your personal tax return. When you sell a property and generate a profit, or realize a capital increase through trading, you are generally obligated to pay tax on those gains. It's important to note that there is an exception for your primary residence, which may qualify for the primary residence exemption, potentially exempting it from capital gains tax.

When engaging in taxable transactions involving property sales or investments, it is essential to understand the specific rules and exemptions surrounding capital gains tax to accurately fulfil your tax obligations. Read about the property exemptions later in the article.

Adjusted cost base

Adjusted Cost Base (ACB) refers to the modified cost of an asset for tax purposes. It is used to calculate the capital gain or loss when an asset is sold or disposed of. The ACB takes into account the original cost of acquiring the asset, as well as any adjustments such as transaction fees, commissions, and certain expenses related to the acquisition or disposition of the asset.

The ACB is important because it helps determine the taxable gain or loss when selling an asset. To calculate the capital gain or loss, the ACB is subtracted from the proceeds received from the sale. If the proceeds are higher than the ACB, it results in a capital gain, while if the proceeds are lower, it results in a capital loss.

In Ontario, the payment of capital gains tax is influenced by the concept of adjusted cost base. It is important that you maintain a thorough record of your ACB, as the provincial government mandates the tracking of this value. Keeping an accurate total of your adjusted cost base is essential to comply with the provincial requirements and to ensure that you accurately report your capital gains tax.

Tax Treatment of capital gains and business income by the CRA

When your income is primarily sourced from capital gains, it is important to understand how it may be treated by the Canada Revenue Agency (CRA). In certain cases, the CRA may classify such income as business income rather than capital gains. This means that instead of being subject to the 50% capital gain inclusion rate, it would be fully taxed at your marginal tax rate.

The CRA specifically considers income generated from day trading or active trading as business income. Therefore, if your capital gains are derived from these activities, they would likely be categorized as business income by the CRA, resulting in different tax treatment.

It is advisable to consult with a tax professional or seek guidance from the CRA to accurately determine the appropriate classification of your income and ensure compliance with tax regulations.

Claiming capital gains exemptions for farming and fishing properties

There are certain exceptions when it comes to claiming capital gains on personal taxes, and one of those exceptions applies to capital gains from farming or fishing properties. If you or your spouse have ownership, even partial, of a farming or fishing property, you may be eligible for capital gains exemptions. However, you also need to understand that not all properties qualify, and specific criteria must be met to be eligible for these exemptions –

• Ownership of a share of the capital stock in a family farm or fishing corporation by you, your spouse, or common-law partner
• Ownership of an interest in a family farm or fishing partnership by you, your spouse, or common-law partner
• Ownership of real property, including land, buildings, and fishing vessels
• Inclusion of property in capital cost allowance Class 14.1, such as milk and egg quotas or fishing licenses

Meeting these criteria allows you to potentially claim capital gains exemptions on farming or fishing properties, providing valuable tax benefits for eligible individuals.

Calculating capital gains tax in Ontario

If you have realized capital gains in the previous tax year, it's important to understand how they will impact your tax return. Typically, 50% of the capital gain amount will be added to your total income for the year, which will then be used to determine your tax liability.

To calculate the tax owed on your capital gains, begin by determining your personal income for the year. Then, add the amount of capital gains you have incurred, resulting in a combined total. This total now represents your new personal income amount, and your tax liability will be determined based on the tax bracket you fall into.

• As of January 1, 2022, the breakdown for Ontario personal income tax brackets is as follows 5.05% applies to taxable income up to $46,226
• 9.15% applies to the portion of taxable income exceeding $46,226 but not exceeding $92,454
• 11.16% applies to the portion of taxable income exceeding $92,454 but not exceeding $150,000
• 12.16% applies to the portion of taxable income exceeding $150,000 but not exceeding $220,000
• 13.16% applies to the portion of taxable income exceeding $220,000

You need to also keep in mind that there are federal tax rates as well that you need to consider at the time of calculating tax on your total taxable income.