I received a T5008 from my brokerage indicating that I had proceeds of disposition to report for my taxes. I thought they must have made a mistake because I didn’t remember selling anything. Then I remembered I transferred some shares in kind from my non-registered account to my TFSA account and from my non-registered account to my RRSP account earlier in the year.
I did this so that I didn’t have to pay the commission again on my income generating asset (I already paid it the first time when purchasing it for my non-registered account). The non-realized capital gain at the time was also a small amount so that I wouldn’t have to pay too much capital gains tax on it.
Little did I realize, after doing that, one year later, I spent an inordinate amount of time trying to calculate my adjusted cost base because I bought so many of these particular shares over time in my non-registered account. It was not very fun.
I’m not an accountant, so please consult your professional accountant for verification and for further details.
What is a Capital Gain Tax Rate?
A capital gains tax that occurs when you sell a security (stock) in a non-registered account (not a TFSA or RRSP).
In Canada, capital gains are taxed at 50% of your marginal rate.
Let’s say you sold BMO (which I would never do, it’s one of my favourite Canadian dividend stocks) for a profit of $10,000. Only $5000 of that would be taxed at your current marginal tax rate (I like to check Taxtips.ca for this). So let’s say your rate was 31%. That’s your capital gains tax rate for Canada. You only pay taxes on your realized capital gains (like you’re making it formal, and selling the shares and ‘cashing out’).
Let’s assume that the $10,000 was the capital gain after accounting for the selling price and the ACB.
What is ACB? Adjusted Cost Base (according to the government of Canada) is the cost of the property plus any fees to acquire it.
ACB (adjusted cost base) = Book Value (what you paid for the stock) + Commissions/Fees
Capital gain or capital loss= Selling price – ACB (how much buying this stock cost you)
Therefore, the capital gains tax rate would be:
$10,000/ 2= $5000
$5000 x 31%= $1550
So on a $10,000 profit, you would pay $1550 of taxes on this amount.
To lower your capital gains tax, you can offset them with capital losses, or lower your marginal rate.
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When Does This Not Matter?
When does this not matter? When do you not have to worry about capital gains taxes and capital gains tax rates?
When your investments are in a TFSA or RRSP or registered account.
You don’t have to keep meticulous information when it is in a registered account because there are no capital gains to pay (or on the flip side, capital losses to claim) when your investments are sold in a registered account like a TFSA or RRSP.
In addition to the tax shelter benefits of these registered accounts, that’s the beauty of the TFSA and RRSP and why I am a fan of both (and fill up both before I have to spill over into my non-registered accounts).
Although it sucks to take a loss and realize a loss, capital losses can be carried back 3 years to previous tax returns or forward to any year.
- Tax Efficient Investing in Canada
- How are dividends taxed in Canada?
- Canadian Covered Call ETFs (Good Income for Retirees?)
- T1135 Form
How Do I Keep Track of My Capital Gains?
Since I get online statements with Questrade, it’s a bit of a gong show to filter through each statement and find when and where I sold my non-registered stocks to trigger a capital gain. This tax season, I had the luxury of using Wealthica to find my capital gains information and the purchase dates and adjusted cost base very quickly.
It’s a free website, like the personal capital of Canada, where you can see all your investments in one place.
If you use Questrade with Wealthica, they import 5 years by default through API. They state they can import more upon request.
Wealthica tells you the book value and the quantity of shares and the date that it happened.
You just click on the individual transaction to open it up, and then you can get the book value.
As you can see, it’s very easy to look up information, as you can filter through the transaction type e.g. transfer or buy or dividend.
If you’re interested in signing up for Wealthica, they have generously provided a Google Sheets Export ($5.99/month value) for 3 months to readers who link more than $100K in investments. Just email me for the promo code (click on the button below). Here’s my Google Sheets Export add-on review. It’s very useful for tax time.
An Even Easier Way to Get the Adjusted Cost Base
Starting in April 2019, Wealthica actually made it even easier to get the adjusted cost base for your non-registered capital losses and gains. They added a new “Realized Gains Report” feature as part of their free add-ons.
Instead of doing the complex calculations required to figure out your ACB and keeping methodical records of when you bought something and when you sold something and how much commission you paid, Wealthica now has a feature for this and you don’t even need to do any sort of calculation. Best of all, it’s free!
Here’s what it looks like:
As you can see you can filter it by the exact company that you purchased for your DIY portfolio and see when you bought and when you sold and the fee you paid and the automatic ACB calculation.
As you can see, the realized gains report is very easy to use and I’m glad Wealthica created this because it was very painful to try and figure out my records for non-registered stocks.
How Do I Keep it Simple When TransferRing in Kind?
So as mentioned, I shot myself in the foot, when I purchased multiple small amounts of shares of MO over 2017 and 2018 (like 21 shares here, 11 shares there, 10 shares there, and 7 shares there). Then I transferred in kind to my RRSP of 22 shares (given that I didn’t want to go over my RRSP limit).
Since I bought shares in different episodic periods of the same stock, I had different ACBs, depending on the book value.
Learned my lesson, won’t do that anymore.
To keep it simple when transferring in kind, transfer in kind the amount that you purchased. For example, I bought 11 shares of BMO in 2017 (when it was a good price and there wasn’t enough cash in my TFSA) in my non-registered.
Then in 2018, I transferred 11 shares of BMO to my TFSA in kind. Come to do my 2018 taxes in 2019, it was much easier to calculate the adjusted cost base for this proceeds of disposition because I had exactly the same number of shares that I transferred.
That’s how I plan to keep in simple in the future when transferring in kind when I have a capital gain.
Now, if you have a capital loss and you transfer in kind to your RRSP or TFSA, the loss is not deductible. When this occurs, it would be better if you sold the shares and then used the cash (if you didn’t have cash to invest in your TFSA/RRSP) to contribute instead. Then you would at least be able to use or carry forward your capital loss.
How do you keep track of your capital gains?
Do you sell often? Have you finished your taxes?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.