Capital Gains Tax in Ontario

One area that many individuals need to consider for their personal income tax is the capital gains tax. To find out what capital gains are and how they affect your personal tax return, read on below.

How Capital Gains Tax Works in Ontario

In today’s financial environment, many individuals make the choice to invest, whether it is an investment in stocks, shares in a mutual fund, real estate holding investment or an investment in exchange-traded funds.

Essentially, the term capital gains is if the value of the asset increases, the amount of capital that you have invested increases. In other words, you have gained capital. Since this is a form of income, you are required to pay capital gains tax in Ontario when the capital gain is “realized.” Realized capital gain means that you have sold or traded the investment, solidifying the increase in your gained capital and putting the capital in your pocket. It’s at this point that you are required to pay capital gains tax in Ontario.

Conversely, you aren’t required to pay capital gains tax in Ontario if the gains aren’t realized, meaning you haven’t sold off the investment and gained that capital from the sale as a result of the increase in value.

Did you sell your property in the last year and make a profit? Did you see an increase in your stocks and trade it off in your favor? Then it’s more than likely that capital gains tax is going to be an influential element of your personal tax return. 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.

Farming and Fishing Properties

There are few exceptions when it comes to claiming capital gains in your personal taxes—capital gains from a farming or fishing property are one of those exceptions. If you or your spouse own even part of a farming or fishing property, you may be eligible for capital gains exemptions. Not all properties qualify, however. In order to qualify, the following criteria must be met:

• A share of the capital stock of a family farm or fishing corporation that you or your spouse or common-law partner owns.
• An interest in a family farm or fishing partnership that you or your spouse or common-law partner owns.
• Real property, such as land, buildings, and fishing vessels.
• Property included in capital cost allowance Class 14.1, such as milk and egg quotas, or fishing licenses.

Adjusted Cost Base

With buying and selling, expenses and fees can occur that affect the overall capital gains total. Adjusted cost base is the concept that takes all transactional gains and losses into consideration to calculate an accurate total of the actual capital gains.

Adjusted cost base influences how capital gains taxes are paid in Nova Scotia. 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. It’s vital to keep a record of your adjusted cost base as the provincial government requires that you keep a running total of the adjusted cost base.

For information on how to calculate your Adjusted Cost Base, visit our blog post here.

Capital Gains Tax in Ontario and Your Return

If you experienced capital gains in the past tax year, 50% of the capital gain will be added to the amount of income that you will claim on your personal tax return. To calculate how much tax you will be paying as a result of your capital gains over the year, determine your personal income for the year and then add the amount of capital gained in the year to create one larger total.

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. Effective January 1, 2022, the tax bracket breakdown for Ontario personal income tax is below:

• 5.05% on the portion of your taxable income that is $46,226 or less, plus
• 9.15% on the portion of your taxable income that is more than $46,226 but not more than $92,454, plus
• 11.16% on the portion of your taxable income that is more than $92,454 but not more than $150,000 plus
• 12.16% on the portion of your taxable income that is more than $150,000 but not more than $220,000, plus
• 13.16% on the portion of your taxable income that is more than $220,000.

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.