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What Is Capital Tax? Definition & Meaning

Updated: November 25, 2022

In Canada, there is a wealth tax that concerns financial corporations. This tax is unique in the fact that it levies the tax based on the assets of the corporation, rather than the income.

This tax is what is known as the capital tax.

But what exactly is capital tax? And how is it calculated?

Read on as we take a closer look at everything to do with this tax system and give you a breakdown of how it is calculated and an example of capital tax at play.

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    KEY TAKEAWAYS

    • A capital tax is a tax that is imposed on financial corporations in Canada.
    • It is essentially a wealth tax, rather than an income tax.
    • Any capital taxes that are paid on a provincial level are deductible. This is for federal income tax purposes.

    What Is a Capital Tax?

    A capital tax is a tax that is levied on a corporation. The tax is based on the corporation’s assets rather than its taxable income. Canada was one of the few nations in the Organization for Economic Co-operation and Development (OECD) that levied both a provincial capital tax as well as a federal tax. 

    In 2006, Canada limited its federal capital tax to financial corporations. And some provinces situated within Canada also collect a capital that is specific to financial institutions. 

    The capital tax in Canada calculates a corporation’s total capital as:

    • The total shareholder’s equity
    • It’s long-term debt
    • The retained earnings
    • Any further surpluses

    A corporation can deduct some of its investments in other corporations from its taxable Canadian capital. Any financial institution that has taxable capital employed in Canada that exceeds $10,000,000 is required to file a capital tax form (schedule 34). Although only financial institutions that have a capital employed that exceeds $1 billion need to pay the federal capital tax. 

    Capital tax is also commonly known as corporation capital tax (CCT). 

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    How Is Capital Tax Calculated?

    Capital tax is calculated according to the capital gains tax rate. 

    In Canada, 50% of the value of any capital gains is subject to tax. If you sell the investments at a higher price than you initially paid, you need to add 50% of the capital gain to your income. This is known as realized capital gain. 

    This essentially means that the amount of additional tax you pay will vary. This depends on how much the company is making and what other sources of income it has. 

    In order to calculate capital tax, you need to figure out the adjusted cost base. This can be done with the following formula:

    Adjusted Cost Base Formula

    Once this has been calculated, you can use the following formula to calculate the amount of taxable capital:

    Taxable Capital Gain Formula
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    Example of Capital Tax

    Let’s say that Company X bought 100 shares of Company Y. The total cost was $500 and they paid a $25 commission fee. The adjusted cost base (ACB) would therefore be $525.

    Now let’s say that Company X bought 200 shares, but the share price has increased. The total cost is now $1,400 with a $25 commission. The adjusted cost base is now $1,425.

    To figure out the ACB per share we can use the above formula:

    ACB = $525 + $1,425 = $1,950

    Now to find out the individual ACB per share, you need to divide this by the number of shares owned:

    ACB per share = $1,950 / 300 = $6.50

    Now let’s say that Company X decides to sell 200 shares of Company Y. Company X decides to sell these shares when they reach a sale price of $20 per share in the stock market. There is a $50 brokerage fee that comes with this. With this information, we can find out the market price:

    200 shares x $20 sale price = $4,000 – $50 = $3950

    To find out if the company has experience a capital gain, or capital losses, we just use the information we now have: 

    200 shares x $6.50 ACB per share = $1,300

    $3,950 – $1,300 = $2,650

    So there is capital in excess of $2,650. This is the taxable basis of capital gain you’ll need to pay tax on. Since the rate in Canada is 50%, the capital tax payable is $1,350.

    Summary

    Capital tax is a wealth tax levied on financial corporations. Canada has a corporate capital tax rate of 50%, meaning any capital gain that goes past the threshold is halved due to the tax.

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    Capital Tax FAQs

    How Can You Avoid Capital Tax?

    To legally minimize your capital tax, you can:

    • Use tax-advantaged accounts
    • Engage in tax-loss harvesting activities
    • Donate assets to a charitable organization
    • Carry over any excess capital losses to the next fiscal year

    What Is a Tax Capital Asset?

    Capital assets are any significant pieces of equipment. They have to be used for longer than a year and are not sold as part of your normal business operations.

    What Happens if You Don’t Pay Capital Gains Tax?

    If the capital gains taxes aren’t paid, you may face large interest payments on the amount of tax owed. Plus any penalties that may be more than the interest owed on the tax. This is both on long-term capital gains and short-term gains.

    How Much Is Capital Gains Tax on Property?

    The capital gains rate in Canada is currently set at 50% on a default basis.

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