Capital Gains and Capital Losses Explained

The basic calculation

A capital gain is generally proceeds of disposition minus adjusted cost base and selling costs. The taxable capital gain is based on the inclusion rate applicable to the transaction and period. Because capital-gains rules have been subject to legislative change, confirm the rate that applies before filing or planning a sale.

Adjusted cost base is a running total

When identical shares are bought at different times, Canadian tax reporting generally uses an average adjusted cost base across holdings, not a first-in-first-out calculation. Commissions increase cost. Returns of capital can reduce cost. Reinvested distributions may increase cost even though no cash was received.

Example

Nadia buys 100 shares for $4,000 plus $20 commission and later buys 50 more for $2,700 plus $15 commission. Total cost is $6,735 for 150 shares, or $44.90 per share.

She sells 60 shares for $3,600 and pays $25 commission. The ACB of the shares sold is $2,694. Proceeds net of selling cost are $3,575, producing a gain of $881 before applying the relevant inclusion rate.

Capital losses

Allowable capital losses generally offset taxable capital gains, not employment or business income. Net capital losses may be carried to other years under the rules. Losses on personal-use property, superficial losses and losses involving affiliated persons require special review.

Superficial-loss trap

Selling an investment at a loss and repurchasing identical property within the specified period can deny the loss where the taxpayer or an affiliated person still owns the property. The denied loss may be added to another person's cost in some situations, but the result and ownership should be tracked.

Recordkeeping

Keep full transaction histories, foreign-exchange rates, corporate-action notices and an independent ACB schedule. Broker 'book value' is useful but may be incomplete when assets were transferred between institutions or held in multiple accounts.