Capital gains tax in Saskatchewan

That moment when you get to know that your investments have increased in value and as a result you have made a profit is always a happy one. But you need to understand that it does affect your personal income tax as well. Read on to know all about capital gains tax in Saskatchewan.

Let’s start by understanding how to capital gains tax work, followed by details of capital gains tax in Saskatchewan.

How to capital gains tax work?

In Canada, capital gains tax is a tax imposed on the profit realized from the sale of specific assets referred to as capital property. Capital gains tax applies to the profit realized when you sell or dispose of certain capital assets. Common examples of capital property include real estate, stocks, bonds, and valuable personal items like art or jewelry. The capital gain is calculated as the selling price (proceeds of disposition) minus the original purchase price (adjusted cost base) and any associated selling expenses.

Investments encompass a diverse range of assets, which may include stocks, mutual funds, and real estate holdings. The ultimate goal of investing is typically to generate capital gains, which represent a profit realized when an individual sells or is deemed to have sold an asset or investment for a sum exceeding its adjusted cost base (explained further below) and the associated selling expenses.

Capital gains can be categorized as either realized or unrealized. Let's consider an example: imagine an individual who owns a house, and over a decade of ownership, the house appreciates in value. At the end of the ten-year period, the owner decides to sell the property, making a profit compared to the original purchase price. In this scenario, a sale occurs, and this results in the realization of capital gains.

However, before the sale took place, capital gains were accumulating but remained unrealized because the owner hadn't yet made a profit to include in their personal income. When you do eventually sell an asset and realize a profit, which signifies an increase in capital, you are generally required to pay tax on it at that point. This is unless the property you are selling qualifies for the primary residence exemption, which may exempt it from capital gains tax.

Adjusted Base Cost

The "adjusted cost base" (ACB) is a fundamental financial term employed in the realm of taxation, especially in the computation of capital gains or losses on investments and assets. It represents the original cost of an asset or investment, adjusted for various factors that can impact its value over time. The ACB is used to determine the taxable capital gain or loss when you sell or dispose of an asset.

Key components that can affect the adjusted cost base include –

• Purchase Price: The initial amount paid to acquire the asset or investment.
• Capital Improvements: The cost of any significant improvements or enhancements made to the asset. These expenses are typically added to the ACB because they increase the asset's value.
• Transaction Costs: Expenses incurred during the purchase, such as brokerage fees, legal fees, and commissions, can be added to the ACB.
• Dividends or Distributions: If you receive dividends or distributions from an investment, these amounts are often subtracted from the ACB because they reduce your investment's value.
• Return of Capital: In some cases, you may receive a return of capital, which is also subtracted from the ACB.
• Reinvested Income: If you reinvest income or dividends earned from an investment, the reinvested amounts are added to the ACB.

Calculating the ACB accurately is essential when determining the capital gain or loss upon selling or disposing of an asset. The capital gain is calculated by subtracting the ACB from the proceeds of disposition (the sale price or fair market value of the asset at the time of disposal). If the proceeds exceed the ACB, you have a capital gain, which may be subject to taxation. If the proceeds are lower than the ACB, you incur a capital loss, which may be used to offset capital gains in the same or future tax years.

Capital gains tax in Saskatchewan

Capital gains, even though they are a part of your total personal income, are subject to a unique tax treatment. In Saskatchewan, only 50% of your capital gains are subject to taxation, and this taxation is based on your marginal income tax rate. To determine your annual tax obligation, you should include half of your realized capital gains in your total personal income and apply the relevant tax rate corresponding to your income bracket. Afterward, you calculate your personal income tax in the same way as you would for regular personal income.

Keep in mind that not all capital gains receive identical treatment. There are special provisions that apply to capital gains stemming from the sale of qualified farm or fishing properties. If you think you might qualify for the Qualified Lifetime Exemption for capital gains associated with a farm or fishing property, additional factors may come into play.

Tax brackets in Saskatchewan

The following rates are based on taxable income for the 2021 tax year.

Saskatchewan Provincial Income Tax Rates for 2021 –

• 0% on the first $45,225 of taxable income
• 10.5% on the portion of taxable income between $45,226 and $129,214
• 11.5% on the portion of taxable income over $129,214

In addition to provincial income tax, individuals in Saskatchewan are also subject to federal income tax based on the federal tax brackets, which are separate from provincial tax rates.

Please be aware that tax brackets and rates can change from year to year due to legislative updates and changes in government policy. Always consult the most recent tax information or seek advice from a tax professional when preparing your taxes.