How to calculate after-tax return if investor can use capital loss, in Canada?

Question

[Source:] As you can see in the table, the $105,000 government bond matures at $100,000, for a capital loss of $5,000. The investor would also collect interest totalling $9,660 over the three years ($100,000 x 0.0322 x 3). But here’s the thing: Even though the capital loss takes a big bite out of the investor’s return, the entire $9,660 in interest payments is taxable at the investor’s marginal rate (which is assumed here to be 46.41%).

The tax hit works out to $4,483. If you subtract that amount, and the $5,000 capital loss, from the $9,660, in interest the investor is left with an after-tax return of just $177. True, he could theoretically use the capital loss to offset other capital gains – assuming he has them – but that would only boost the net return to $1,337, which is still pretty lousy. True, he could theoretically use the capital loss to offset other capital gains – assuming he has them – but that would only boost the net return to $1,337, which is still pretty lousy.

To calculate the after-tax return with the use of $5,000 capital loss, why perform the arithmetic coloured in orange above? To wit, why multiply $5000 x 50% x 46.41%?
I know that the article assumes 46.41% as the investor's marginal tax rate.

Answer 1

Capital gains have what's called a 50% inclusion rate. IOW only 50% of the gain is taxable.

It's this rate that makes premium bonds a bad investment. If interest and capital gains were taxed at the same rate, it wouldn't matter. OTOH it's a great time to buy discount bonds if you can find them.

The inclusion rate can change. In 1990 it was 75%, before that it was ~67% for a time. We have this rate because it's somewhat unfair (if this word can ever apply to taxes) to tax long term capital gains at 100% since much of the gain can be due to inflation. As such, it's not a real gain.