Understanding Capital Gains – YLaw Group

Going through a separation or divorce in British Columbia? It’s not just about dividing physical assets; understanding how capital gains are handled is a critical piece of the financial puzzle.

Capital gains, essentially the profit you make from selling something like your house or investments, can significantly impact your financial settlement. Let’s break down how they work and how they’re treated during separation in BC.

For a general overview of property division in BC, see our Property Division page.

What are Capital Gains?

Capital gains are the difference between the price you paid for an asset (the adjusted cost base) and the price you sell it for. If the selling price is higher, you have a capital gain.

Only 50% of a capital gain is taxable in Canada. Understanding the basics of property division is important.

How are Capital Gains Calculated at Separation?

To calculate capital gains, the current market value of the asset (the separation date) is subtracted from the original purchase price (also called the “cost basis”). The difference represents the capital gain (or loss). This calculation helps determine how much of the asset’s appreciation or depreciation should be considered when dividing property between both parties.

The calculation involves:

1. Determining the Fair Market Value (FMV): You need to determine the FMV of the asset on the date of separation. For real estate, this usually involves a professional appraisal. For other assets, like stocks, the market value on that date is used. For more information on property appraisals, see our blog on Valuations for Family Property.
2. Calculating the Adjusted Cost Base (ACB): This is the original cost of the asset plus any eligible expenses related to its purchase or improvement.
3. Calculating the Capital Gain or Loss: FMV – ACB = Capital Gain (or Loss).
4. Taxable Capital Gain: Only 50% of the capital gain is added to your income for that tax year.

What are Capital Gains Owed On?

Capital gains can arise from various assets, including:

• Real Estate: The family home, rental properties, or other real estate.
• Investments: Stocks, bonds, mutual funds, or other investments.
• Businesses: Capital gains from the sale of a business.
• Other Assets: Other capital property like artwork, jewelry (depending on value), or collectibles.

How are Capital Gains Split at Separation?

The increase in the value of family property from the date of marriage (or cohabitation) to the date of separation is usually shared equally between the spouses. This applies to capital gains as well. So, even if one spouse owned the asset before the relationship, the increase in value during the relationship is subject to division.

Here’s a simplified example:

• A house was worth $500,000 at the start of the relationship.
• It’s worth $800,000 at separation.
• The capital gain is $300,000.
• $150,000 (half the gain) would be attributed to each spouse. Note: This calculation is for the purpose of property division, not necessarily immediate tax implications.

Important Considerations:

• Capital Gains Exemption & Roll Overs: There are various exemptions and rollovers that can be utilized to assist in lowering the tax implications.
• Adjustments for Costs: Expenses related to buying, selling, or improving an asset (e.g., renovations, legal fees, commissions) may reduce the taxable capital gain.
• Professional Advice: Calculating and dividing capital gains can be complex. It’s crucial to seek advice from a family lawyer and a tax professional to ensure a fair and accurate settlement.

Understanding how capital gains are treated at the time of separation is essential for a fair financial settlement in BC. Given the complexities involved, seeking professional advice is highly recommended. Our experienced family lawyers can help. Contact us here or call us at 604-974-9529 for a consultation.