All about capital gains tax in Alberta

In Alberta, the tax system is distinctively designed to accommodate different forms of personal income. Beyond the regular earnings from employment, individuals may also benefit from alternative income streams, including capital gains. It is crucial for those living in Alberta and receiving income from diverse sources to grasp the tax consequences associated with capital gains.

Basics of capital gains tax

Capital gains emerge when the selling price of an investment or real estate exceeds the price at which it was originally purchased, indicating an increase in the asset's value. This phenomenon is most commonly observed with assets such as stocks, mutual funds, and ETFs (Exchange-Traded Funds). In contrast, a capital loss is recorded when an asset's selling price falls below its purchase price. The obligation to pay taxes on these gains arises when they are realized, meaning the asset has been sold or otherwise disposed of, turning the increase in value into actual monetary profit.

Distinguishing between realized and unrealized capital gains is essential. Realized gains are those where the profit has been converted into cash through the sale or disposal of the asset. Conversely, unrealized gains refer to the appreciation of the asset's value that remains on paper because the asset has not yet been sold.

In specific instances, such as when a capital asset is transferred as a gift, the taxation treatment can change. However, this change does not automatically result in tax benefits. For instance, if an asset is transferred for a value much lower than its market value or is gifted, the CRA (Canadian Revenue Agency) assesses the asset at its fair market value to ascertain whether a capital gain has occurred, impacting the tax implications of such transactions.

Capital gains tax in Alberta

The taxation framework in Alberta is designed to accommodate different sources of income distinctly. Notably, income earned from employment is taxed more heavily than income from capital gains or dividends. In Alberta, the tax rate applied to employment income is based on an individual's marginal rate, which stands as the highest rate among the various types of income. In contrast, capital gains — profits from the sale of an asset above its purchase price — are taxed differently. Specifically, only half (50%) of the capital gains amount is considered taxable at the individual's marginal tax rate. For instance, if an asset bought for $30,000 is later sold for $120,000, resulting in a $90,000 capital gain, only $45,000 (50% of the $90,000 gain) is subject to tax.

It is imperative for individuals to meticulously document all forms of personal income, including both capital gains and employment income, throughout the year. This diligent record-keeping serves as a critical reference point and supports the validation of income claims if necessary. Such thorough documentation aids in ensuring the accuracy of reported income and substantiates the authenticity of the reported figures.

Upon calculating the total capital gains for the year, it is essential to integrate this amount into the total personal income reported on your tax return. To assess the tax owed on capital gains, one must include half of the gains in the total annual personal income. This adjusted income total is then used to calculate the tax liability on capital gains, according to the tax bracket that applies to the individual's overall income level.

For the 2022 tax year, Alberta's tax rates are structured as follows, based on income brackets:

- 10% for taxable income up to $131,220,

- 12% for the portion of income exceeding $131,220 and up to $157,464,

- 13% for income over $157,464 and up to $209,952,

- 14% for income over $209,952 and up to $314,928,

- 15% for income exceeding $314,928.

This tiered tax structure applies progressively higher tax rates to higher income brackets, reflecting Alberta's graduated personal income tax system. It highlights the necessity for individuals to accurately assess their tax obligations based on their specific income levels.

Moreover, it's vital to remember that provincial tax rates are only one component of the total tax obligation, as federal tax rates also apply to taxable income, further affecting the total tax liability for Alberta residents.

The process of claiming capital gains in Alberta

For individuals managing capital gains, there are two primary options available for reporting, each tailored to specific scenarios. One can opt for a capital gains reserve if the proceeds from the sale of an asset are received over time rather than in a single payment. Alternatively, individuals who meet certain criteria may be eligible to claim a capital gains deduction, which can reduce taxable income.

When preparing to report capital gains from any source, it's essential to fill out Schedule 3, which is a necessary component of the tax return process.

Additionally, it's important to highlight that if an individual has experienced capital losses from investments, these losses can be used to offset capital gains. Effectively, this can lead to a reduction in the capital gains tax owed, as the amount of the loss can be deducted from the total gains.