A capital gain is a profit realized from the sale of a ‘capital asset’. This gain or profit aligns with the category of ‘income’. As such, a tax needs to be paid on this amount in the year that the transfer of the capital asset takes place. A specific taxation system focuses on these profits, known as capital gains tax, which comes in two forms: short-term and long-term.
Long-term Capital Gains Tax
This type of levy applies to the profits derived from the sale of assets held for an extended period—typically more than a year. The applicable rates are 0%, 15%, and 20% and vary depending on your tax bracket.
Short-term Capital Gains Tax
The Short-term Capital Gains Tax applies to assets held for a year or less. This form of the tax is typically treated as ordinary income.
Capital gains can be reduced through the deduction of capital losses. These losses occur when a taxable asset is sold for less than its original purchase price. Consequently, the total of capital gains minus any capital losses results in what is referred to as “net capital gains.” Notably, tax on capital gains is only triggered when an asset is sold or “realized.”
The Eventual Impact on Stocks
Stock shares that appreciate every year will not be subject to capital gains tax until they are sold. This is because the appreciation of stock shares is considered an unrealized gain as long as the stocks remain unsold.
| Type of Asset | Considered Capital Asset? |
|---|---|
| Land | Yes |
| Building | Yes |
| House property | Yes |
| Vehicles | Yes |
| Patents | Yes |
| Trademarks | Yes |
| Leasehold rights | Yes |
| Machinery | Yes |
| Jewellery | Yes |
The Concept of Realized Gain
Realized gain results from selling an asset at a higher price than the original purchase price. It occurs when an asset is sold at a level above its book value cost. While an asset may be carried on a balance sheet at a level far above cost, any gains while the asset is still held are considered unrealized.
Inherited Property and Capital Gains Tax
Capital gains tax does not apply to an inherited property as the transfer of ownership doesn’t equate to a sale. The Income Tax Act exempts assets received as gifts by way of inheritance or will. However, if the person who inherits the asset decides to sell it, they will have to pay the capital gains tax.