CAPITAL GAINS SYSTEM (PG. 263-297)

Question 1

CAPITAL GAINS RESERVE

Answer 1

Payments associated withe capital transactions that may occur over time, as a means to recognize payments that occur over multiple taxation years

Question 2

CAPITAL GAINS RESERVE RULE

Answer 2

1/5 of the taxapyer’s taxable capital gain must be reported in the year of sale and each of the four following years, to a maximum of five years

Question 3

MAXIMUM RESERVE AMOUNT

Answer 3

The lesser of:

1) (Proceeds not yet due / total proceeds) X Gain
2) (1/5 of gain) X (4 - # of preceding tax years ending after disposition)

Question 4

PRINCIPAL RESIDENCE

Answer 4

Considered a personal-use property. A housing unit owned by an individual and ordinarily inhabited in the year that individual or the individual’s spouse/common law partner or former, and child

Question 5

ORDINARILY INHABITED

Answer 5

Periodic use of a cottage or vacation property

Question 6

PRINCIPAL RESIDENCE EXEMPTION

Answer 6

Provides an exemption from taxation for the taxpayer’s principal residence

Question 7

CHANGE IN USE RULE

Answer 7

When a propoerty ceases to be a principal residence and is changed to a rental property, or when a rental property is changed to become a principal residence.

Question 8

PARTIAL CHANGE IN USE RULE

Answer 8

Occurs when a property owner decides to rent out part of the house to an arm’s length individual

Question 9

CAPITAL GAINS DEDUCTION (CGD)

Answer 9

A deduction that is applied against the taxable capital gain, thus reducing the taxable capital gain

Question 10

CAPITAL GAINS EXEMPTION (CGE)

Answer 10

Reduces the capital gain

Question 11

TAXABLE CAPITAL GAIN

Answer 11

Half of a capital gain

Question 12

LIFETIME CAPITAL GAINS EXEMPTION (LCGE)

Answer 12

The maximum amount eligible individuals are entitled to and applies to net gains realized on dispositions of qualifying property

Question 13

QUALIFIED SMALL BUSINESS CORPORATION SHARES (QSBCS)

Answer 13

Shares of a corporation that qualify as property to be eligible for the LCGE

Question 14

SMALL BUSINESS CORPORATION

Answer 14

A CCPC that uses all or substantially all of the FMV of the assets principally in an active business carried on primarily in Canada by the particular corporation or a corporation related to it.

Question 15

PRINCIPALLY

Answer 15

50% or more

Question 16

SUBSTANTIALLY ALL

Answer 16

At least 90%

Question 17

ACTIVE BUSINESS

Answer 17

Business carried on by the taxpayer other than a specified investment business or a personal services business

Question 18

QUALIFIED FARM/FISHING PROPERTY

Answer 18

1) Share of capital stock of a family farm/fishing corporation owned by the taxpayer or the taxpayer’s spouse
2) Interest in a family farm/fishing partnership owned by the taxpayer or the taxpayer’s spouse
3) Real property
4) Property included in CCA Class 14.1

Question 19

PURIFICATION

Answer 19

A strategy used when a corporation holds assets that are not consistent with the requirements to qualify for the capital gains deduction. (The process of reducing the corporation’s ownership of non-qualifying assets to increase the percentage of qualifying assets)

Question 20

MAXIMUM LIFETIME CAPITAL GAINS EXEMPTION LIMIT

Answer 20

The base limit a taxpayer can claim against the disposition of qualifying property (QSBC & QFFP)

Question 21

UNUSED LIFETIME DEDUCTION

Answer 21

50% of the maximum lifetime capital gains exemption less all previously claimed capital gains deduction

Question 22

ANNUAL GAINS LIMIT

Answer 22

The taxpayer’s maximum entitlement to a capital gains deduction for the current year (Pg. 284)

Question 23

CUMMULATIVE GAINS LIMIT

Answer 23

The taxpayer’s maximum entitlement to a capital gains deduction for all years (Pg. 284)

Question 24

CUMMULATIVE NET INVESTMENT LOSS (CNIL)

Answer 24

The cummulative excess of deductible investment expenses (interest paid, carrying charges, losses from passive investments in partnerships, plus losses from rental real estate), over the cummulative total of investment income (interest, dividends, passive income from partnerships, rental property)

Note:
1) If cummulative investment income exceeds cummulative investment expenses, CNIL is zero

1) If cummulative investment expenses exceeds cummulative investment income, CNIL accoutn will carry a balance

Question 25

ALLOWABLE BUSINESS INVESTMENT LOSSES (ABILs)

Answer 25

Investments in the capital shares of, or loans to, small business corporations (may be deducted against any other forms of income)

Question 26

ALTERNATIVE MINIMUM TAX (AMT)

Answer 26

The temporary additional tax liability due in addition to the capital gain, which arises from the fact that the effective includion rate on capital gains for AMT purporses is 80% (income of an additional 30% of net capital gains above the 50% included in the regular tax system Pg. 292).

Note: Impact arises when taxpayer has a disposition that qualifies for the capital gains exemption, but has very littler other income in a particular year

Question 27

CRYSTALLIZING

Answer 27

A way of securing a future tax savings by undertaking a tax-deferred rollover of shares to another corporation, and electing a transfer price equal to the available CGE (shares are not disposed for cash