Taxes On capital gain

Quick question,

When do you pay taxes on capital gain? does the company you use for trading take it at the time of the trade or do you have to keep track of it for income tax time?

You have the responsibility to track all your income from all sources (employment, capital gains, bank interest, etc....). The CRA operates on a self-reporting basis where you tell them what you have earned and they will audit a sample of people to confirm the validity. However, the CRA receives a report of all your income already through T4, T5, etc..., so they generally already know if the amount you report is correct (if you receive a slip, CRA receives a slip too). They are getting more and more automated.

Capital gains can be a tricky one, especially with foreign exchange involved, as Fred and Alberto saw last year when I did their taxes, so the CRA is never entirely sure if you are reporting the correct amount. At least track for each purchase and sale: the date, price per share (in CAD), number of shares, and commission and you can figure out the tax side later (see below). You can at least dump these records on your accountant or tax preparer to sort out.

While you can report whatever you like and try and get away with it, I recommend to try and be as honest as possible (especially with the small things). It is not just about being ethical, it is about not giving the CRA a reason to flag your account in order to look into other things.

To answer your question, capital gains tax is not deducted at the source (when you sell the stock). No withholdings are made during the year like you see taken off your paycheque, so you can have a significant tax bill at the end of the year on your capital gains from trading stocks. Luckily, only half of the capital gain is taxed (another way of putting it is the entire gain is taxed at half the normal rate).

For tax purposes you are required to track the ACB or Adjusted Cost Base (essentially the average purchase price including commissions to buy). The reason you track the average purchase price is so you cannot play around with your income. For example:

Sep 1 Buy 100 shares at $5
Sep 10 Buy 100 shares at $6
Sep 30 Sell 100 shares at $7

What is your capital gain on the sale? Is it $2, since the first 100 shares you bought were at $5? Should it be $1, since you sold the last 100 shares at $6 for a quick profit and planned to hold the first 100 shares to sell later?

It is too complicated to match sales with many individual pruchases, so you must track the average cost ((100 shares x $5) + (100 shares x $6)) divided by 200 total shares = 200 shares @ $5.5. Your true capital gain would therefore be $1.5 x 100 shares, and you would be left with 100 shares at a cost of $5.5 to be sold at a later date.

Sep 1 Buy 100 shares at $5 (ACB $5 x 100 shares)
Sep 10 Buy 100 shares at $6 (ACB $5.5 x 200 shares)
Sep 30 Sell 100 shares at $7 (ACB $5.5 x 100 shares & capital gain (($7 - $5.5) x 100 shares))
Oct 10 Buy 100 shares at $8 (ACB $ 6.75 x 200 shares)
etc....

When calculating the capital gain, commissions to buy the stock are included in the purchase price (ACB). Commissions to sell the stock are deducted from the Proceeds of Disposition (selling price x # shares sold).

Any income (capital gain or otherwise) earned in TFSA will have no tax when withdrawn from TFSA. In RRSP it makes no difference if income is received as capital gain or other income since all are taxed like income from employment when withdrawn from the RRSP (the entire amount of the withdrawl is taxed, not just the growth). Therefore, inside TFSA or RRSP, there is no need to track the purchase and sale of stocks for tax purposes. However, there are certain rules to be aware of with regard to contributions and withdrawls, which we can address at a later time.

The bank will usually send you a form during tax season which summarizes all of your trades. It will show you the date, purchase price, sell price etc. I still recommend keeping a record of it. I use google finance to keep this record, but it would be more useful in excel.

As Eric said, for Canadian stocks you only get taxed on half of your gains. For US stocks, you get taxed on all of them. You do not have to pay taxes until tax season... unless you are making piles of money... in which case pay someone else to do your taxes.

Fred Douche wrote:As Eric said, for Canadian stocks you only get taxed on half of your gains. For US stocks, you get taxed on all of them.

I think maybe you are thinking about dividends. For Canadian citizens, capital gains are taxed the same regardless of whether they are Canadian or US stocks, but it is correct that with dividends from US companies, they are taxed like normal income, while dividends from Canadian companies are taxed at approx half of the normal rate.

US citizens have "long term" and "short term" capital gains and they are hugely rewarded for holding a stock for more than 1 year, since their capital gain tax rate shrinks to about 5%, but it is correct that on short term capital gains as a US citizen, the gains are fully taxable, so maybe that was what Fred was referring to. Keep this fact in mind when trading US stocks, as the majority of shareholders are US residents and their trading behaviour will be different as a result.

This is a great read....I realize how important it is to know these calculations now.

Thanks guys!