Personal income can come from a variety of sources, including labour. But what about capital gains from investments? Personal income earned from an increase in the value of an investment is added onto your personal income, but it’s taxed somewhat differently. Luckily, capital gains tax doesn’t outweigh the profit that you make from the sale or exchange of investment.
Here’s what you need to know about capital gains before heading into this year’s tax season.
How Capital Gains Work
An individual can choose to invest in multiple ways, such as real estate holdings, stocks, and mutual funds. For simplicity, we will use real estate as an example.
It’s highly common that real estate is purchased at one price and, over the years, appreciates in value. When you sell your property for a higher amount and make a profit, this profit is called capital gains. And, since this money goes directly to you, it is considered personal income.
Capital gains can either be realized or unrealized. In the previous example, the house price increased in price and a sale occurred that put the capital gains in the owners ‘pocket.’ However, while that homeowner owned the property over the years, capital gains occurred but weren’t realized until the sale occurred.
Adjusted Cost Base
Adjusted cost base influences how capital gains taxes are paid in Manitoba. As described by the Government of Canada, an 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. The provincial government requires that you keep a running total of the adjusted cost base, which is a set of records that will be needed come tax time.
Capital Gains Tax in Manitoba
As mentioned above, capital gains are considered income and, therefore, you are required to pay income taxes on it. However, capital gains and personal income from employment are taxed differently.
Firstly, only 50% of your capital gains are taxed at your marginal income tax rate in Manitoba.
Also important to know, the amount that you are taxed on, depends on your total personal income over the tax year, which determines which tax bracket (s) you fall under. For example, you make $40,000 a year from your full-time employment and make $20,000 from a small real estate sale.
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. This would equal $50,000 in taxable personal income. On just a provincial tax level, the first $34,431 would be taxed at a rate of 10.8%, with the remaining $15,569 of your personal income from all sources taxed at a rate of 12.75%.
If you have experienced capital gains over the years, the best course of action to take is to seek professional guidance when filing taxes.
Tax Brackets in Manitoba
As implied above, personal income at both a federal and provincial level are taxed at different rates depending on the amount of personal income experienced over the year. The tax rates for 2022 are the following for Manitoba residents:
- 10.8% on the portion of your taxable income that is $34,431 or less, plus
- 12.75% on the portion of your taxable income that is more than $34,431 but less than, or equal to $74,416, plus
- 17.4% on the remaining portion of your taxable income, that is more than $133,638.
Exemptions exist for capital gains earned from the sale of qualified farm or fishing properties.
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 Manitoba
As a resident of Manitoba, you must claim capital gains on your personal income tax slip. Your ability to deduct capital gains from your personal income depends on how you receive the gains. If you received payments, you can file your capital gains as a reserve, which allows you to spread your capital gains income tax payable to the government over a few years.
Ensure that you keep all relevant paperwork and documentation that demonstrates your personal income in general in addition to records for transactions where capital gains were realized.
Remember, you can also reduce your capital gains if you also have capital losses from other investments.
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