Your personal income tax payable to the government is influenced by a variety of factors including your source of personal income. Whereas most individuals get their personal income from employment, many individuals also have income from investments. This income is referred to as capital gains. For an overview of what capital gains tax in PEI means for you, read our guide below.
A Deeper Dive into Capital Gains
For many individuals, investments are a mandatory part of their financial portfolio. Investments can take the form of stocks, mutual funds and real estate, to name a few. For most people in their lifetime, real estate is a definite investment, a form that can incur capital gains and losses.
In simple terms, capital gains or losses relate to the amount of money gained or lost as a result of the value change of an investment. To illustrate, take the example of buying a house. When an individual purchases a house at a particular price, it is assumed that the value of the home will appreciate, or increase. When the home is eventually sold, the change in value then affects your personal income. If the selling price was higher and the seller makes a profit, this is referred to as ‘realized’ capital gain.
Since a sale occurred that put the capital gains in the owners ‘pocket’ capital gains were realized. However, before this sale capital gains were still occurring but had not been realized since the owners didn’t have a profit to add to their personal income. 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.
All investment transactions typically involve a number of fees, such as commissions and legal fees. These fees also influence the capital gains tax for residents in PEI and are all accounted for within the concept of the adjusted cost base.
Adjusted Cost Base
Adjusted cost base takes all transactional gains and losses into account. From there, the adjusted cost base indicates an accurate total of the actual capital gains that you can then claim as part of your personal income.
Adjusted cost base influences how capital gains taxes are paid in PEI. The provincial and federal governments both require that you keep a record of your adjusted cost base. If you’re not sure where to begin calculating your adjusted cost base, we have a blog that will help here.
Capital Gains Tax in PEI
50% of capital gains is taxed at the marginal income tax rate for PEI residents since it’s a specific form of personal income. To calculate, add 50% of your net capital gains total to your personal income.
Tax Brackets in PEI
When calculating your personal income and capital gains taxes in PEI, calculations start with referencing the staggered tax brackets to come to the final total of personal income payable to the government (before deductions and other credits):
- 9.8% on the portion of your taxable income that is $31,984 or less, plus
- 13.8% on the portion of your taxable income that is more than $31,984 but not more than $63,969, plus
- 16.7% on the portion of your taxable income that is more than $63,969
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 on Taxes in PEI
Before claiming your personal and capital gains taxes in PEI, be sure to collect all relevant documentation for your personal income, including records of all capital gains and losses and adjusted cost base calculations. This information is helpful while filing your taxes, but should be kept on record for the next 7-10 years.
To begin claiming your capital gains or losses for the year 2019, fill out the Schedule 3 – Capital Gains (or Losses) in 2019 in addition to the 5002-C PE428 form, which is the general form used to calculate your personal income taxes.
Remember, you can also reduce your capital gains if you also have capital losses from other investments.
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