The way capital gains tax is treated varies from province to province, including British Columbia. If you reside in British Columbia and are getting prepared for this year’s personal income tax season, it’s important to brush up on what capital gains mean in general and for your own tax return.
Explaining Capital Gains
When you make money off of a real estate sale, stock increase or an exchange-traded fund, you experience a capital gain. A capital gain is an increase in the value of an investment or real estate holding from the original purchase price. Since the capital gain is a form of personal income, you are required to pay tax on it.
However, taxes are only paid on a capital gain that is ‘realized.’ Realized capital gains means that, essentially, the increase in value in your investment went directly to you as a result of a sale. Property is the perfect example for this – if your home continues to rise in value but you haven’t sold it, the capital gain has not been realized and, therefore, you do not have to pay tax on it. If you do sell the property and make a profit – an increase in capital – you have to pay tax on it at that point unless the property you are selling is your primary residence and qualifies for the primary residence exemption.
Capital gains can be claimed as a gift, which changes the way that capital gains are treated, but doesn’t guarantee that the individual will save any money.
Adjusted Cost Base
Another term to consider in terms of capital gain is adjusted cost base. Adjusted cost base influences capital gains taxes in British Columbia, primarily because the provincial government requires that you keep a running total of the adjusted cost base. As described by the Government of Canada, adjusted cost base (ACB) is the cost of a property (or other investment) plus any expenses to acquire it, such as commissions and legal fees.
Capital Gains Tax in British Columbia
The amount that your capital gains is taxed depends on your total personal income over the tax year, even though income from employment is taxed differently from capital gains or dividends. Only 50% of your capital gains are taxed at your marginal tax rate in British Columbia, meaning that to calculate the amount of tax that you will owe over the year, you will need to add half of your realized capital gains to your total personal income and tax it according to the bracket under which your income falls.
With that in mind, it’s still important to get professional guidance when filing taxes when you have experienced capital gains. Since every individual has a unique financial situation, making the most of your return takes knowledge of all the different credits and laws for taxation provincially and federally.
Tax Brackets in British Columbia
After determining your personal income for the year and adding 50% of your realized capital gains amounts to the income total, you can estimate how much tax you will have paid or owed over the year. This total is now your new personal income amount and, therefore, you will be taxed on your capital gains according to the tax bracket that you are in. British Columbia tax rates for 2019 are the following:
- Income that is $0 to $41,725 is taxed at 5.06%
- Additional income between $41,725.01 and $83,451 is taxed at 7.70%
- Additional income between$83,451.01 to $95,812 is taxed at 10.50%
- Additional income between$95,812.01 to $116,344 is taxed at 12.29%
- Additional income between$116,344.01 to $157,748 is taxed at 14.70%
- Additional income $157,748.01 to $220,000 is taxed at 16.80%
- Over $220,000 is taxed at 20.5%
Don’t forget though, that there are also Federal tax rates that you must consider when calculating your total taxes on your taxable income. Read our blog on Federal tax rates for more information.
How to Claim Capital Gains in British Columbia
You can either claim a capital gains deduction or declare a capital gains reserve, which applies to you if you are receiving payments over a period of time, rather than all at once. To accurately report eligible capital gains from all sources, a Schedule 3 form must be filled out.
Remember, you can also reduce your capital gains if you also have capital losses from other investments.
TurboTax Can Help!
Tax season can be much more simple with TurboTax solutions. Our online Canadian tax software allows you to ensure that you get the most out of your tax return, using as much or as little tax expert assistance as you would like. To view the TurboTax suite of solutions, click here.
For more information in regards to capital gains visit our blog post here.