What is capital gains tax?

Capital gains tax must be paid on the profit that comes from the sale of an asset. An asset can be a security, such as a stock or a bond, or a fixed asset, such as land, buildings, equipment or other possessions. Let’s look at an example. Say you purchased 1,000 shares of TD Bank at $20 per share many years ago, and when it reaches about $40 per share, you decide to sell. Your proceeds from the sale are $40,000 ($40 per share multiplied by 1,000 shares) and your cost (the cost of purchase) is $20,000 ($20 per share multiplied by 1,000 shares). This means that your profit on the sale, also known as your capital gain, is $20,000. [ofie_ad] Capital gains are given favourable tax treatment in Canada. You only pay tax on 50% of the amount of your capital gain (the 50% amount is known as the capital gains inclusion rate). So, the amount of your taxable capital gain is only $10,000 ($20,000 multiplied by 50%). If your tax rate is 40%, you would only pay $4,000 in taxes ($10,000 in taxable capital gains multiplied by a 40% tax rate). If we compare this to interest income, you can see the advantage of capital gains. Interest income is fully taxable, so that same income of $20,000 at a tax rate of 40% would cost you $8,000 ($20,000 in interest income multiplied by a 40% tax rate). That is double what you would pay on the income from a capital gain. What is capital gains tax? Capital gains tax is a great way to plan your income to pay less taxes. All forms of income have their place in a properly planned portfolio, but by planning ahead you can minimize your overall tax burden and maximize the money you save (and the size of your investment portfolio).