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TAXX301 ch.8
Capital Gains and Losses
| Question | Answer |
|---|---|
| are capital gains a source of income? | no, they are disposition of property (depreciable, non-depreciable, personal) |
| what basis does the ITA use to determine ownership? | beneficiary ownership (not legal ownership) |
| what is a beneficiary owner? | person with ownership rights like possession, use, risk (legal liability to enforce rights as owner) |
| what is capital property? | depreciable or non-depreciable property used to earn income. disposition could result in gain or loss |
| what is personal property? | personally owned items that have nothing to do with earning income |
| what is a disposition? | a transaction or events entitling the taxpayer to proceeds of disposition of property |
| what are the 8 examples of dispositions mentioned in the slides? | - sale - redemption of shares - maturity of bond - expiry of option - a gift - theft, expropriation, destruction - certain events causing "deemed disposition" |
| what are the 3 non-examples of disposition mentioned in the slides? | - property transfer for use as collateral security in borrowing - share issuance by corporation - issuance of bonds or other debt obligations |
| what value are deemed dispositions treated as? | generally FMV |
| what are proceeds of disposition? | sale price of property that's been sold (also includes compensation received from insurance on stolen/damaged property, and deemed POD from deemed disposition) |
| what does ACB stand for? | adjusted cost base (represents cost of property sold) |
| what is the ACB for depreciable property? | capital cost |
| what is the ACB for non-depreciable property? | cost + specific adjustments |
| what are outlays and expenses? | expenditures incurred if not for disposition (reduces amount of capital gain, increases capital loss) |
| what are the 6 examples of outlays and expenditures mentioned in the slides? | - fixing up expenses - finders fees - surveyors fees - legal fees - transfer fees - advertising costs |
| what is the three-question assessment of a superficial loss? | 1. was there a disposition resulting in capital loss? 2. was same property purchased in period that began 30 days before disposition and ended 30 days after disposition? 3. on 30th day after disposition, did individual still own property? *SL if 3x yes |
| what is the impact of a superficial loss? | SL added to ACB of replacement property *administrative concession allows SL to be equal to proportional number of shares repurchased if only partial replacement |
| what is the impact of a negative ACB? | added to net income as a capital gain in amount to make ACB nil |
| what is the impact of GST/HST on capital gains? | recoverable through an ITC if used in carrying on a business (cost of property reduced by ITC recovery) |
| what are identical properties? | properties which are not the same in all material respects so that prospective buyer wouldn't have preference for one over the other (weighted avg calculation to determine ACB) |
| what is the impact of a warranty on capital property is seller receives consideration before filing due date for sale year? | warranty amount included in POD, expenditures reduce POD |
| what is the impact of a warranty on capital property if seller receives consideration after filing due date for sale year? | warranty amount treated as a capital gain, expenditures treated as capital loss |
| what is a capital gains reserve? | all POD not received in cash in disposition |
| are capital gains a source of income? | no, they are disposition of property (depreciable, non-depreciable, personal) |
| what basis does the ITA use to determine ownership? | beneficiary ownership (not legal ownership) |
| what is a beneficiary owner? | person with ownership rights like possession, use, risk (legal liability to enforce rights as owner) |
| what is capital property? | depreciable or non-depreciable property used to earn income. disposition could result in gain or loss |
| what is personal property? | personally owned items that have nothing to do with earning income |
| what is a disposition? | a transaction or events entitling the taxpayer to proceeds of disposition of property |
| what are the 8 examples of dispositions mentioned in the slides? | - sale - redemption of shares - maturity of bond - expiry of option - a gift - theft, expropriation, destruction - certain events causing "deemed disposition" |
| what are the 3 non-examples of disposition mentioned in the slides? | - property transfer for use as collateral security in borrowing - share issuance by corporation - issuance of bonds or other debt obligations |
| what value are deemed dispositions treated as? | generally FMV |
| what are proceeds of disposition? | sale price of property that's been sold (also includes compensation received from insurance on stolen/damaged property, and deemed POD from deemed disposition) |
| what does ACB stand for? | adjusted cost base (represents cost of property sold) |
| what is the ACB for depreciable property? | capital cost |
| what is the ACB for non-depreciable property? | cost + specific adjustments |
| what are outlays and expenses? | expenditures incurred if not for disposition (reduces amount of capital gain, increases capital loss) |
| what are the 6 examples of outlays and expenditures mentioned in the slides? | - fixing up expenses - finders fees - surveyors fees - legal fees - transfer fees - advertising costs |
| what is the three-question assessment of a superficial loss? | 1. was there a disposition resulting in capital loss? 2. was same property purchased in period that began 30 days before disposition and ended 30 days after disposition? 3. on 30th day after disposition, did individual still own property? *SL if 3x yes |
| what is the impact of a superficial loss? | SL added to ACB of replacement property *administrative concession allows SL to be equal to proportional number of shares repurchased if only partial replacement |
| what is the impact of a negative ACB? | added to net income as a capital gain in amount to make ACB nil |
| what is the impact of GST/HST on capital gains? | recoverable through an ITC if used in carrying on a business (cost of property reduced by ITC recovery) |
| what are identical properties? | properties which are not the same in all material respects so that prospective buyer wouldn't have preference for one over the other (weighted avg calculation to determine ACB) |
| what is the impact of a warranty on capital property is seller receives consideration before filing due date for sale year? | warranty amount included in POD, expenditures reduce POD |
| what is the impact of a warranty on capital property if seller receives consideration after filing due date for sale year? | warranty amount treated as a capital gain, expenditures treated as capital loss |
| what is a capital gains reserve? | - all POD not received in cash in disposition year could result in insufficient funds to pay income tax - reserve is allowed if parts of proceeds aren't payable until after year of sale |
| what is the limit to the capital gains reserve? | lesser of: - (total gain x 20%)(4-# tax years ending after disposition) - total gain * (proceeds payable after tax year/total POD) |
| how is the calculated capital gains reserve applied? | is is deducted from capital gain in current year and reassessed using same system in future years |
| how do bad debts on sale of capital property affect capital gains? | capital loss is allowed in year debt is established as bad debt * if amount received in future, treated as capital gain |
| when is debt considered to be "bad"? | - when creditor has exhausted all legal means of collecting, and - debtor has become insolvent and unable to pay amount |
| what is the problem with sale of land and building? | incentive to manipulate allocation of POD to create terminal loss on building |
| how is the loss restriction for sale of land and building calculated? | lesser of: FMV land + building - reduced by lesser of: - ACB land - FMV land and Greater of: - FMV building - lesser of: - capital cost building - UCC building |
| what is the exception to the loss restriction for sale of land and building? | principle residence |
| what are the 3 criteria for a principle residence? | - housing unit owned by the individual - ordinarily inhabited by the individual - designated by individual as principle residence |
| what are the limitations for claiming a primary residence? | - 1 taxpayer per family can claim a primary residence - land limit of 1/2 hectare |
| what occurs when multiple properties are claimed as primary residence and disposed? | there is a gain reduction formula of A - [A*(B/C) - D] A=total capital gain B=years designated as PR +1 C=#years property owned D=ignore (relates to 1994) *ownership period includes year of purchase and sale |
| what does PUP stand for? | personal use property |
| what is personal use property? | property owned by the taxpayer and used primarily for personal use or enjoyment of taxpayer/relatives |
| what are the capital gain/loss impacts on sale of PUP? | capital gains on PUP are taxable, however POD and ACB have a maximum of $1,000. Capital losses on PUP are not deductible (exception if LPP) |
| what does LPP stand for? | listed personal property |
| what are the 5 examples of LPP in the slides? | - a print, drawing, painting, or similar work of art - jewelry - rare folio, manuscript, or book - stamp - coin |
| how is a gain/loss on foreign currency exchange treated if it is from an income transaction? | gain/loss included in business income |
| how is a gain/loss on foreign currency treated if it's from disposition of cpaital property | treated as a capital gain/loss |
| what are the capital gain/loss impacts on sale of PUP? | capital gains on PUP are taxable, however POD and ACB have a maximum of $1,000. Capital losses on PUP are not deductible (exception if LPP) |
| what does LPP stand for? | listed personal property |
| what are the 5 examples of LPP in the slides? | - a print, drawing, painting, or similar work of art - jewelry - rare folio, manuscript, or book - stamp - coin |
| how is a gain/loss on foreign currency exchange treated if it is from an income transaction? | gain/loss included in business income |
| how is a gain/loss on foreign currency treated if it's from disposition of cpaital property | treated as capital gain/loss |
| what is ITA 39(1.1)? | - applies to individuals only - for conversion to/from Canadian currency and use of foreign currency to make a purchase or pay amount owed - $200 exception deducted from gain to get capital gain - uses ACB of currency and POD to calculate capita gain |
| what is a deemed disposition? | requirement to assume has happened when a traditional disposition hasn't actually occurred |
| what are the 2 situations warranting a deemed disposition? | - change in use - taxpayer severs Canadian residency and becomes non-resident of Canada |
| what type of disposition is warranted when asset is changed from income earning to personal use? | deemed disposition and reacquisition at FMV |
| what type of disposition is warranted when asset is changed from personal to income earning use? | deemed disposition and reacquisition at FMV *if FMV exceeds cost, UCC (not ACB) limited to old capital cost + 1/2 of excess POD over old capital cost |
| what does ancillary use to earn income mean with respect to principle residence? | renting out part of principle residence to earn rental income |
| what are the applications of deemed dispositions with respect to ancillary use of principle residence? | no application of partial disposition if: - income producing is ancillary to purpose as principle res - no structural change to property - no CCA claimed for part of property used for income earning |
| what is the problem with changes in use for automobiles? | % used for personal or income earning changes every year |
| what is the ITA solution to the problem with changes in use to automobiles? | 1. assume automobile is used exclusively for income earning 2. determine maximum CCA 3. apply % use for income earning purpose to determine deductible CCA |
| what is the consequence when someone severs Canadian residency with respect to capital property? | deemed disposition of capital property at FMV immediately before giving up Canadian residency |
| what property are exempt from deemed disposition due to severed Canadian residency? | - real property situated in Canada, Canadian resource properties, timber resource properties - Canadian business property - rights and interests in RPP's, RRSP's, DPSP's, stock options, death benefits, etc. |
| what is the special consequence for sale of ESBC shares with respect to capital gains? | rollover value that reduces capital gain on sale of ESBC shares under certain conditions |
| what does ESBC stand for? | eligible small business corporation |
| what is an eligible small business corporation? | a CCPC with substantially all FMV of assets devoted principally to active business carried on primarily in Canada (assets can't have carrying value in excess of $50M) |
| what are the three criteria for qualifying dispositions of ESBC shares? | - sale of ESBC shares - owned by investor for 185 day period preceding sale - shares purchased directly from ESBC |
| what are replacement shares with respect to ESBC's? | common shares of an ESBC acquired within 120 days after year end which qualifying sale took place (must be designated as replacement shares in the tax return) |
| what is the deferral of capital gains for replacement shares of an ESBC? | deferral limited to fraction of capital gain resulting from qualified disposition (ex. if 75% of proceeds used to buy replacement shares, capital gain reduced by 75%) *permitted deferral is subtracted from cost of replacement shares |
| what is the problem with capital gains taxed when property is replaced? | - taxpayer required to include capital gains and recapture on disposition - proceeds used to purchase replacement reduced due to income tax - results in insufficient funds for replacement |
| what are the provisions that solve the problem of capital gains on property that is replaced? | ITA 13(4) - reduced recapture ITA 44(1) - reduced capital gain |
| how is ITA 13(4) applied? | Jan 1 UCC balance Deduct lesser of: POD Capital Cost Reduced by lesser of: Actual Recapture Replacement Cost Revised Recapture------------------------------------------------- |
| how is ITA 44(1) applied? | Original UCC after dispositions Add: Capital cost of replacement property Less: deemed POD New UCC balance------------------------------------------------- |
| what are the advantages of ITA 13(4) and 44(1)? | - control timing of gains by deferring disposition - use timing to utilize losses - structure sale of capital property to take advantage of capital gain reserves - use elective options to increase access to principle residence exception |
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