What about capital gains?

A capital gain occurs when you sell a capital property for more than its original cost. In general, half the gain is included in your income for the year. The other half is not subject to tax. Certain dispositions resulting in a capital gain are not subject to any tax (see topic 81).

When is a gain a capital gain?

In most circumstances, there is no set rule that determines whether a particular gain should be treated as a capital gain. Most individuals who invest in the stock market can treat their gains and losses as capital gains or losses. However, if you spend considerable time playing the market and/or borrow money to make your purchases, your profits or losses may be taxed in full as business income.

Similarly, if you bought a property intentionally to resell at a profit, the entire gain would be taxable, rather than just half the gain. For example, taxpayers who purchase property for immediate resale—“flipping”—are subject to tax on the full gain, even though they may have spent little time on the venture and may have sold only one or two properties. In some cases, there is no clear-cut answer. If in doubt, consult your tax adviser.

Tax tip: Most taxpayers are eligible to elect capital gains treatment from the disposition of qualifying Canadian securities by filing Form T123. Once you make the election, however, all subsequent gains and losses from the disposition of qualifying securities will be recorded as capital gains and losses. Be sure you understand the implications of making this election before you file the form.

Identical properties

Subject to the special rules for stock option shares (see the following subsection), when you acquire securities that are exactly the same—for example, Class A common shares of XYC Corp.—the shares are pooled for purposes of determining your cost when you sell a portion of the shares.

Example: Assume you buy 100 shares today for $20 each (total cost $2,000) and 50 shares next month for $26 each (total cost $1,300). Your cost per share for tax purposes is $22 (150 shares at a total cost of $3,300). If you then sell 75 shares for $30 each, your capital gain is $600 [($30 – $22) × 75 shares].

There are also special rules if you own identical properties, some of which were acquired before 1972. In this case, two separate pools will determine the cost of the properties sold: one comprising the pre-1972 properties and the other for properties acquired after 1971. On a disposition, you’ll be deemed to have sold the pre-1972 properties before those acquired after 1971.

Sale of stock option shares

The cost base of shares acquired through stock option plans equals the sum of the option price plus the amount of any taxable employment benefit reported with respect to the shares. The amount of a deferred stock option benefit (see topic 37) is added to the cost base of the stock option share at the time the share is acquired, even though the amount is not taxed until the share is disposed of.

But what happens if you acquire shares under a company stock option plan and you already own other identical shares in the company, or if you exercise more than one stock option at the same time? If you sell only some of the shares, how do you calculate the tax cost of the shares sold? The rules in this area are extremely complex. Special rules deem the order in which the shares are disposed of. In addition, in certain cases, a special designation may be available that permits you to designate the new stock option shares as the shares being sold, provided they are sold within 30 days of exercising the option.

Tax tip: Before selling or otherwise disposing of shares acquired under a stock option plan, consult your tax adviser to determine the tax consequences and whether you qualify for the special designation.