Capital Gains & Losses

Question 1

Capital Property

Answer 1

• A property acquired with the intention of holding it to earn income through use
• if an item does not meet capital property definition, it is inventory

Question 2

Capital Property vs Inventory

Answer 2

• the courts will assess intention to determine capital property vs inventory
• primary intention: used as inventory or capital asset?
• secondary intention: at the time of purchase did the taxpayer have the intention to sell at a profit?

Question 3

Tax of disposition of property

Answer 3

• disposition of property is the disposition that entitles a taxpayer to POD (sale, death, ceased residency, gift)
• capital Gain = POD - ACB
• taxable capital gain = 50% x CG

Question 4

Security dispositions that are NOT treated as capital gain

Answer 4

• trader/security dealer
• financial institution
• principal business of lending money/debt
• non-resident

Question 5

Options

Answer 5

• Call option: the grantee pays an amount to the grantor for the right to purchase property from grantor
• Grantee: option price added to the purchase price
• Grantor: option price added to the selling price
• Put option: grantee pays grantor for the right to sell property
• Grantee: option price deducted from POD
• Grantor: option price deducted from ACB

Question 6

Expenses on disposition

Answer 6

• agent/broker commissions
• legal costs
• advertising costs
• bonus paid to discharge mortgage prior to maturity
• other expenses caused by disposition

Question 7

ACB is subject to change by

Answer 7

• government grant
• property taxes that are non-deductible
• stock options
• stock dividends
• superficial losses

Question 8

Superficial loss

Answer 8

• sale to affiliated persons
• not deductible
• sale to trigger loss and then immediately repurchase
• superficial losses are denied and added to the ACB of the property

Question 9

Identical properties

Answer 9

• floating weighted average method used to determine cost (think of ACB of shares flucuations)

Question 10

Capital Gains Reserve

Answer 10

• when disposal, vendor may receive payment over a period of time, where a capital gains reserve can be claimed to defer tax
• reserve = lesser of the 2:
  1) capital gain x (proceeds not due on demand / total proceeds)
  2) 20% of CG x (4 - # of years left after disposing)
• in the years after the sale the PY reserve is added back and new reserve is claimed

Question 11

Business investment loss

Answer 11

• total loss (actual or deemed disposition)
• there are rules that provide tax relief for investment in a failed CCPC

Question 12

Allowable business Investment Loss

Answer 12

• 50% of Business investment loss
• carryback allowed is 3 years, and carryforward allowed is 10 years
• can be applied against all income sources

Question 13

Restricted portion of business investment loss

Answer 13

• lesser of:
  1) business investment loss for the year
  2) cumulative capital gain claimed in PY x a factor for the year
• restricted when LCGE claim in the preceding year or CY

Question 14

Capital vs Income

Answer 14

• intention on acquisition
• relationship of transaction to the business
• nature of asset
• number and frequency of similar transactions
• length of period of ownership
• feasibility of taxpayer intention
• reason for sale