Investing

Can someone explain capital gains to me?

  • Last Updated:
  • Nov 16th, 2017 1:20 pm
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto

Can someone explain capital gains to me?

Ok so I'm admittedly a total n00b when it comes to investing. I have only ever bought stocks and funds in a non-registered acct but have never sold anything so I've never had to deal with capital gains. I'm finding myself in a position now where I may want to start selling and I'm not sure how the capital gains and the taxes work. I've read a bunch of articles so I think I've got the basics but there's some questions I have that aren't covered in the articles I've read.

My understanding is:
  • Capital gains are calculated by subtracting your ACB from your sell price
  • If my ACB is $10 and my sell price is $11 then my capital gain is $1
  • Capital gains are taxed at your marginal tax rate at an inclusion rate of 50% as of today

What I don't understand is what is the number that adds to my income? Using my example above, if my ACB is $10 and my sell price is $11, is it $0.50c that is added to my income or is it $1 or is it $11 or is it neither?

So let's say that my income from work is $42,201 so I'm in the first marginal tax bracket in Ontario (20.05%). If I sell 1 share of company X for $11 and my ACB is $10 is my income that I report to the CRA now $42,212 or is my income $42,202 and then I'm taxed on $0.50c at a marginal rate of 24.15% because I've now reached a new tax bracket because of the capital gain?
11 replies
Member
Aug 7, 2014
325 posts
107 upvotes
In your example, the taxable capital gain is $0.5, that is half of the $1 capital gain. You include the taxable cap gain into your income.
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto
psudolam wrote:
Nov 8th, 2017 11:14 pm
In your example, the taxable capital gain is $0.5, that is half of the $1 capital gain. You include the taxable cap gain into your income.
Ok so in my example then my income would be $42,201.50?

That's $42,201 income + 50% of my $1 capital gain which is $0.50.

So if that's the case, in my second scenario the 50c added to my income has now pushed me into the next marginal tax bracket of 24.15% from the original 20.05%. So the 50c will be taxed at 24.15% and I keep the rest, yes?

Thanks for your reply.
Newbie
Jan 2, 2009
98 posts
13 upvotes
gqbluez wrote:
Nov 8th, 2017 11:41 pm
Ok so in my example then my income would be $42,201.50?

That's $42,201 income + 50% of my $1 capital gain which is $0.50.

So if that's the case, in my second scenario the 50c added to my income has now pushed me into the next marginal tax bracket of 24.15% from the original 20.05%. So the 50c will be taxed at 24.15% and I keep the rest, yes?

Thanks for your reply.
I'm pretty sure the answer is yes you will be pushed into the next tax bracket. But you only get taxed at the new rate for the amount over 42,201 so it is minimal.

Federal tax rates for 2017

15% on the first $45,916 of taxable income, +
20.5% on the next $45,915 of taxable income (on the portion of taxable income over $45,916 up to $91,831), +
26% on the next $50,522 of taxable income (on the portion of taxable income over $91,831 up to $142,353), +
29% on the next $60,447 of taxable income (on the portion of taxable income over $142,353 up to $202,800), +
33% of taxable income over $202,800.

Provincial tax rates for 2017 for Ontario

5.05% on the first $42,201 of taxable income, +
9.15% on the next $42,203, +
11.16% on the next $65,596, +
12.16% on the next $70,000, +
13.16 % on the amount over $220,000

Link for reference
https://www.canada.ca/en/revenue-agency ... years.html
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto
Thanks for the reply!
Member
Aug 10, 2015
227 posts
142 upvotes
Toronto
Helpful thread with no one attacking OP to use google! Good job internet!
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto
viiveyy wrote:
Nov 9th, 2017 2:13 pm
Helpful thread with no one attacking OP to use google! Good job internet!
I took a risk and posted the question here fully expecting to get flamed but honestly I did google before posting...a lot... But I couldn't decipher or get a straight answer to the scenarios that I posted above from prewritten blogs and articles. Reddit threads came close but honestly more times than not RFD has been really helpful.

Good job internet indeed!
Member
Mar 14, 2010
233 posts
92 upvotes
Toronto
I'd like to add a suggestion: that you think long and hard about whether you should cash in your winnings and take that capital gain.

If your salary is meeting your needs and you haven't a) lost your job b) had to go on extended sick leave, or c) must use it for a down payment on a house, you don't NEED the money. So why are you cashing in your investment?

If the investment is a sound one (say, a stable stock with a dividend that will continue to add to your holdings) I would encourage you not to sell. Using the funds for a new investment sounds ok but isn't really because you will incur taxes when you sell -- taxes in addition to those taxes paid when you earned the money that you invested. The wonderful thing about deferred capital gains is that you DON'T pay taxes on this increased wealth until (and unless) you sell it. That's how people grow their wealth: deferring taxes while adding to their gains, year after year. Whatever new investment will wait until you have saved enough funds to pay for it. Trying to time the market is a futile effort.

If you bought a speculative stock with no dividend, your situation is different. Your risk level is higher. However "Buy and Hold" is a worthy mantra of advice. Unless you think you made a bad investment and should grab your money and run, I think you should let it ride. Your goal is to add to your investments, not cash them in to purchase the flavour of the month. My 2 cents.
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto
pickles02 wrote:
Nov 12th, 2017 6:25 pm
I'd like to add a suggestion: that you think long and hard about whether you should cash in your winnings and take that capital gain.

If your salary is meeting your needs and you haven't a) lost your job b) had to go on extended sick leave, or c) must use it for a down payment on a house, you don't NEED the money. So why are you cashing in your investment?

If the investment is a sound one (say, a stable stock with a dividend that will continue to add to your holdings) I would encourage you not to sell. Using the funds for a new investment sounds ok but isn't really because you will incur taxes when you sell -- taxes in addition to those taxes paid when you earned the money that you invested. The wonderful thing about deferred capital gains is that you DON'T pay taxes on this increased wealth until (and unless) you sell it. That's how people grow their wealth: deferring taxes while adding to their gains, year after year. Whatever new investment will wait until you have saved enough funds to pay for it. Trying to time the market is a futile effort.

If you bought a speculative stock with no dividend, your situation is different. Your risk level is higher. However "Buy and Hold" is a worthy mantra of advice. Unless you think you made a bad investment and should grab your money and run, I think you should let it ride. Your goal is to add to your investments, not cash them in to purchase the flavour of the month. My 2 cents.
This is great advice and I have considered this viewpoint. The stock I am thinking of selling is definitely stable, has a good dividend yield, and there really is no other reason to sell other than I think it's doing very well and I want to start to realize some of those gains.

The issue for me is that the shares I am thinking of selling have made up over 80% of my portfolio all concentrated on this one stock so even though it's doing well I want to start diversifying and buying some other securities. A lot of the shares were earned through an employee share program for many years where I was getting a match but I'm no longer with that company and no longer benefiting from a match. Further to that I have some other ETF's and e-series funds that also hold this company so really I think my exposure to this one stock is greater than 80% of my portfolio.

Really this is more about de-risking myself more than anything else.
Member
Mar 14, 2010
233 posts
92 upvotes
Toronto
gqbluez wrote:
Nov 12th, 2017 7:12 pm
This is great advice and I have considered this viewpoint. The stock I am thinking of selling is definitely stable, has a good dividend yield, and there really is no other reason to sell other than I think it's doing very well and I want to start to realize some of those gains.

The issue for me is that the shares I am thinking of selling have made up over 80% of my portfolio all concentrated on this one stock so even though it's doing well I want to start diversifying and buying some other securities. A lot of the shares were earned through an employee share program for many years where I was getting a match but I'm no longer with that company and no longer benefiting from a match. Further to that I have some other ETF's and e-series funds that also hold this company so really I think my exposure to this one stock is greater than 80% of my portfolio.

Really this is more about de-risking myself more than anything else.
If you have a sizeable profit from this stock, you will pay a sizeable capital gain. You might be better off to sell the ETFs and buy different funds that don't include your stock (or only a tiny amount of it). Ditto for the e-funds, though I think you can switch from onefund to another without paying any fee. I'm assuming you are not dripping your stock but are saving the dividends it generates for other investments.

If the capital gain you would owe by selling shares in your one stock holding worries you but you really want to de-risk, consider donating some of the stock to a charity. Larger charities will handle the transaction for you. Essentially, you don't sell the shares yourself, you sign them over to the charity which sells them and gives you a tax receipt for the current value of the shares. You pay no capital gains at all and you will get a healthy tax credit next April instead of jumping to a higher tax bracket.

De-risking doesn't have to happen overnight, however. Where the stock is stable and paying a sustainable income, there is no panic. Of course, this is a decision for you to make. I don't have enough details about your situation to advise you more specifically which of the options outlined above would work best for you.
[OP]
Deal Addict
Sep 7, 2004
1218 posts
226 upvotes
Toronto
pickles02 wrote:
Nov 13th, 2017 12:56 am
If you have a sizeable profit from this stock, you will pay a sizeable capital gain. You might be better off to sell the ETFs and buy different funds that don't include your stock (or only a tiny amount of it). Ditto for the e-funds, though I think you can switch from onefund to another without paying any fee. I'm assuming you are not dripping your stock but are saving the dividends it generates for other investments.

If the capital gain you would owe by selling shares in your one stock holding worries you but you really want to de-risk, consider donating some of the stock to a charity. Larger charities will handle the transaction for you. Essentially, you don't sell the shares yourself, you sign them over to the charity which sells them and gives you a tax receipt for the current value of the shares. You pay no capital gains at all and you will get a healthy tax credit next April instead of jumping to a higher tax bracket.

De-risking doesn't have to happen overnight, however. Where the stock is stable and paying a sustainable income, there is no panic. Of course, this is a decision for you to make. I don't have enough details about your situation to advise you more specifically which of the options outlined above would work best for you.
I was dripping at one point but have stopped the drip and am now going to use the cash to invest in other funds. I've since sold 25% of my position and now need to redeploy the cash elsewhere but probably in another ETF like XAW or VXC to get a bit more foreign exposure. Given my current allocations I still feel a bit overweight on Canadian markets.

I hadn't considered donating to charity so that's something I can think about in the future should I cross over into the next tax bracket. As it stands right now I still have a little wiggle room so am not in any immediate danger of crossing that threshold.

Totally understand that de-risking doesnt have to happen overnight so I think over the next couple years I'll start to replace this stock with other stable dividend stocks. For now I'm happy with where I started and likely won't make any drastic changes for some time to come.

Thanks for your help here and I appreciate your insight.

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