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Understanding Capital Gains


There’s two weeks before your tax returns are due for 2015, so if you haven’t started preparing your documents and figuring out your tax deductions, now’s the time to do it! One of the most confusing and complicated values to calculate for personal income tax purposes is capital gains. Unlike all the other types of income that you might make over the course of the year, capital gains values are not mailed to you by your financial institution. This is something that you will have to do yourself and determine how much, if any, taxes you might be owing.

What Are Capital Gains?

Capital gains are what you get for selling an investment at a greater price than what you bought it for. This applies to many types of investments from bonds, stocks, real estate, etc… As long as the price that you receive is higher than the price you paid, then you have a capital gain.

Conversely, if you sell something for less than what you bought it for, then you have a capital loss. A capital loss can be used to offset any capital gains that you might have so that it diminishes the amount of tax that you pay.

Profit = Price You Sell – Price You Buy

When Profit > 0 you have a Capital Gain

When Profit < 0 you have a Capital Loss

It’s all very easy to understand. Or is it?

Currency Gains

One of the most annoying things I found with doing capital gains calculations is that you have to take currency into effect. One of the more common mistakes people make is they just subtract the price they bought from the price they sold and use that as the capital gains amount. That’s not entirely true.

If you live in Canada, you need to make sure that all of your calculations are done in Canadian currency. It’s also not as simple as just taking the difference and converting it to Canadian dollars using today’s exchange rate. That’s not how you go about doing it.

What you should be doing is converting the amount at which you bought your investment into Canadian currency using the exchange rate on the day it was bought. You then need to  do the same with the amount you sold your investment using the exchange rate on the date you sold.

img_BoC_Exchange-Rates_01-500x250Now you might wonder, “how the heck do you get exchange rates for past days?” Easy. Just bookmark the Bank of Canada exchange rate site. The Bank of Canada site has a calculator that will convert amounts up to 10 years ago. Just select the date you bought or sold and enter your amount in the currency of your investment. The Canadian amount will come up for you.

It’s not unfathomable to actually have investments that you thought lost money to actually have made you money due to currency fluctuation. The opposite could also happen if the Canadian dollar rises over time and makes gains become losses due to a rising Canadian dollar.

Gains from currency fluctuations are also subject to capital gains tax, so make sure you declare you capital gains properly. The Canadian Revenue Agency will always ask for the dates in which you bought and sold your investments. This way they can audit your returns to ensure you are doing proper due diligence on currency conversions.

Unrealized Gains

You might be asking. “Do I need to do these calculations for stocks or bonds that have gone up in value but I have not yet sold?” The answer is no. If you don’t sell any of your holdings you will not trigger any capital gains or losses.

You can perpetually hold on to your investments for as long as you want and they can go up as high as they can and you will never have to pay taxes on the gains until you sell. These paper gains are generally called unrealized gains. They haven’t been realized because it’s only in theory that you have made money. The government doesn’t consider you to have actually made anything until you sell your investments.

Capital Losses

Hey, I know this article is about capital gains, but capital losses can also occur. Capital losses should be applied against capital gains that you incur during the same year. This means you should be subtracted the amount you loss against what you gained. If, for whatever reason, you have more losses than gains, then it is possible to carry forward losses to be used to write off gains for future years.

If your losses are greater than your gains, then you would declare a capital loss on your tax return. There will be no need to pay taxes on the gains that you had with other investments if this happens.

Declare The Right Amount

If you have doubts on how to calculate capital gains, then definitely give the CRA website a visit. I’ve outlined a very basic rudimentary formula to use when calculating capital gains, but if you deal mainly with property, or farmland, then there are other exclusions, expenditures and rules that may affect your capital gains calculation.

Capital gains can be a really tricky thing to track. In a digital age, we have become reliant on computerized systems to do all the work for us, but at the current moment this is still a very manual process. If in doubt, seek the assistance of a tax account that can help you understand how to make the proper calculations.

Just remember. Never try to cheat the CRA. It’s not worth the risk.

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