The term “shares” refers to the capital stock of a corporation and in common use may be referred to as , common shares, stocks, and preferred shares.
In very general terms, investments in shares can produce dividend income as well as generate capital gains and losses.
Shares Held Outside Registered Accounts (RRSPs & RRIFs)
Capital Gains & Losses
Simply stated a capital gain is the difference between what you paid for an investment and what you subsequently sold that investment for. Under Canadian tax law, capital gains and losses are only reported in income when they are realized. That is a capital gain or loss will only be reported when an investment in shares is actually sold (and in some circumstances, given away). However, for tax purposes only ½ of the net gain or loss is included in income.
The adjusted cost base of the purchase is the amount you paid for the shares including any brokerage commissions. If the shares were originally purchased prior to December 31, 1971, the adjusted cost base is the Valuation Date amount established by the Income Tax Application Rules (ITAR).
If you have purchased shares in the same corporation over a period of years (i.e. at different times and prices), the cost basis of the shares sold is determined on a weighted average basis: The purchase price paid for all of the shares is divided by the number of shares.
John bought shares of XYZ Corp.
January 15, 1995 – 150 Shares @ $25.50 each plus brokerage fees of $75.00
September 1, 2000 – 500 shares @ $42.50 each plus brokerage fees of $75.00
John’s adjusted cost base is as follows:
(150 x $25.50) + $75.00 + (500 x $42.50) + $75.00 = $25,225
The adjusted cost base per share is:
$25,225 / 650 = $38.8077 per share.
John sold 250 of his shares of XYZ Corp. on March 10, 2007 and received $65.00 per share and paid $75.00 in brokerage fees.
John’s proceeds of disposition:
(250 x $65.00) – $75.00 = $16,175
The capital gain and amount to be included on his 2007 tax return:
Capital Gain: $16,175 – (250 x $38.8077) = $6,473.08
Taxable capital gain (1/2 of $6,473,08) = $3,236.54
The proceeds of disposition represent the amount you actually received from the sale less and brokerage fees.
The difference between the proceeds of disposition and the adjusted cost base is the capital gain or loss of which only ½ have of the gains will be included in income. Any net capital losses that are unused may be carried forward indefinitely.
It is important to note that you will not receive a tax slip from your broker for capital gains and you will need to calculate, record and report this on your income tax return manually.
Common and preferred shares may also pay dividends. This receipt of income has a preferential treatment depending on whether the dividends are from Canadian corporation and deemed eligible or ineligible or if they are from foreign corporations.
Normally you will receive a tax slip from your broker or the transfer agent indicating the appropriate dividend amounts and credits to report. If the shares are in private companies or foreign companies you may not receive a tax slip but are still required to report this income for tax purposes.
Dividends from publicly traded companies (i.e. shares listed on a stock exchange) are typically considered eligible dividends although from time to time all or a portion of a dividend may be ineligible.
Eligible dividends are grossed up by 45% and then receive an enhanced dividend tax credit whereas ineligible dividends are grossed up 25% and receive a lower tax credit. For more information, please refer to the Combined Federal & Provincial Marginal Tax Rates & Taxes Payable by Taxable Income on our Tax Rates page.
Dividends from foreign corporations do not receive preferential treatment and are treated as straight income for tax purposes. There is no gross-up and no tax credits applicable to foreign dividends. The dividends received will be subject to a foreign withholding tax to which a tax credit may be claimed on your return.
Dividends received from foreign jurisdictions must be converted to Canadian dollars either on the date of receipt of the dividend or the average exchange rate for the year to determine the amount to include in income.
Shares Held Inside Registered Accounts
Shares held inside a registered account can grow and dividends received free of tax. Funds contributed to the account were deductible when placed inside the account and are thus fully taxable when withdrawn.
Shares in public companies are best held outside registered account as the tax consequences are much better, although this must be balanced against the tax refund that would be available for a contribution.
Note that dividends received from foreign jurisdictions, in many cases are not subject to withholding tax.