Capital gain tax was introduced by the Canadian government in 1972 with the purpose of financing the social security payments and establishing a more equitable taxation system in the country.
Inclusion rate refers to the amount of capital gains that is subject to taxation. Between 1972 and 1988, the rate was 50 percent while in 1988, the same went up to 66.66 percent. Two years later, the inclusion rate skyrocketed to 75 percent and in 2000, the government established a lower rate of 66.67 percent. Implemented as a part of the Five-Year Tax Reduction Plan, this cut was the largest in the tax history of the country. The tax rate percentage was actually 2 percent lower than the capital gains tax in the United States. At present, 50 percent of one’s capital gains are subject to taxation in Canada. If your capital gains are $1000, only half of the sum or $500 is taxable. Individuals in the top tax bracket are taxed at approximately 43 percent. The capital gain tax amounts to $500 x 0.43 or $215. The reduction of the inclusion rate is especially beneficial for start-up businesses because it increases their chances to raise financing. Risk-taking and investment is more rewarding because the investors are allowed to retain a larger portion of their gain. Furthermore, international businesses also benefit from investing in Canada.
Canadians are exempted from tax gains under certain circumstances. For example, money from home sales and profits from registered education and registered retirement savings plans are not subject to taxation. Canadian citizens who aim at reducing their capital gains tax have to first determine if they qualify for deductions. Residents of Canada who have been taxpayers during the current tax year are eligible for deductions. In addition, individuals who lease or rent a property in Canada or have resided in the country for at least 183 days are also considered full-time residents. There is a lifetime capital gains exemption in the amount of $750,000 while the deduction for property sale is up to $375,000. In other words, if you sell corporate shares to make a profit, the first $750,000 are received tax-free. Deductions may be claimed on capital gains from dispositions of stocks of small business entities or fishing and farming properties. Unincorporated business entities such as partnerships and sole proprietorships do not qualify for tax exemptions, which is among the major benefits of corporations. Note that the shares of most investment companies don’t qualify for exemption as well.
In order to qualify for deductions, persons should have been Canadian residents at the time of disposition. It is also advisable to determine the amount of capital losses during the taxable year, if any. Subtract all losses for the current tax year from your capital gains and if you get a negative balance, you might have a net capital loss. You may carry forward and deduct capital losses from your capital gains in the next tax years. This information has to be recorded on Form T936.