Capital gains as part of the basics of investing

When it comes to investing, some believe that learning the complexities of the market allows for greater success. However, often, that doesn’t have to be the case. In fact, the simpler one can make investing, the better it can be understood and put to good use. Capital gains is a good example.

Indeed, capital gains is a concept that some investors simply take for granted. But you might be surprised at how misinformed some people may be on the topic. For example, here in Canada, one often hears about the 50-percent number for capital-gains taxation.

What gets taxed, and what doesn’t

Believe it or not, some think this means that capital gains are taxed at a rate of 50 percent. That’s why there’s often an outcry at the 50-percent number, because it’s thought that half of the profits are taken away. Of course, this is not the case.

How capital-gains taxation actually works in Canada is that half of the gains are subject to being taxed — within your personal income-tax bracket.

Let’s use a quick example. Let’s say you buy an investment property for $1 million. Five years later, you sell it for $1.5 million. That’s a capital gain of $500,000, correct? In terms of tax, you don’t pay $250,000, or 50-percent of your capital gains. Instead you take 50-percent of the capital gain, which is $250,000, and apply your tax bracket to that amount.

The difference it makes

So, in Ontario, if you’re in the highest tax bracket of 53.53 percent, you would pay a capital-gains tax of $133,825, which is 58 percent less than what many people think, and the tax savings could be larger if you’re in a lower income bracket or can use capital losses to offset the gains.

Some of this may sound simple. But, if you don’t understand some of the basics in investing, your foundation for success is not as strong as it should be.

ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.