Ch. 12 Capital Gains and Losses Flashcards
What are the different types of deemed dispositions?
change in use of property
death of a taxpayer
ceasing to be a resident
gifting of property to another persona
acquisition
What are capital gain reserves?
On the disposition of capital property, a vendor might pay you overtime vs a lump sum. To help with the timing, a reserve may be allowed to be claimed to defer the payment of taxes/
Lesser of:
Capital gains x (proceeds not due / total proceeds)
20% of capital gain x (4 - number of preceding years ending after the disposition)
- this ensures that it will be brought into income by the end of the 5th year
How do you determine between capital gain vs business income?
Primary intention and secondary intention (their backup plan)
But since these are states of minds and not observable, they look at behavioral factors:
- relationship to taxpayer business (is it similar to what they do)
- nature of the asset (used over time - capital asset)
- number and frequency (large number over a period of time = inventory aka business)
- length of the period (longer implies capital)
What special election is available for Canadian securities?
You can treat them as capital transactions regardless of intention - but this is irreversible.
not available for - traders, dealers in securities, financial institutions, corporation that lends money, debt, or for non-residents.
this means that 50% will get taxed, and 50% is deductible, but you won’t be able to deduct from all sources of income - only capital.
this is good if you have:
- frequent transactions
- short period of ownership
- knowledge of market
How are capital gains/losses calculated?
Proceeds - ACB - Expense of dispositions
Expensess are any costs that allow the taxpayer to make the sale. For example, comissions, legal costs, advertising, bonuses paid to discharge, other expenses directly related.
What are some deemed disposition events?
Change in use
death of a tax payer
ceasing to be a resident
How are call options prices dealt with?
Grantor - option price is added to the selling price
Grantee - option price is added to the purchase price
Call - option to purchase
How are put options dealt with
Grantor - price is deducted from ACB
Grantee - deducted from proceeds of sale
Put - option to sell
What are superficial losses
These are capital losses that are denied as a result of an affiliated person:
- acquire or reaquiring the same property within a 30 day period (before or after)
What are capital gain reserves?
When the vendor agrees to receive payment over time, this way a reserve can be align with the cash avaliable.
it is calculated as the lesser of:
Capital gain x (proceeds not due / total proceeds)
20% of cpaital gain x ( 4 x # years after disposition)
What are the formulas to claculate how much of the gain to icnlude for capital gain reserves?
Year of sale = (capital gain - reserve) x capital gain inclusion rate (50%)
year after sale = (prior year reserve - current year) * 50%
What are BILs (Business investment losses)
provides tax relief for investing in shares or debt of a failed small Canadian business
SBC - 90% of assets are used in active business
ABIL = 50% of the loss - deductible against any source of income
Can be carried back 3, forward 10. If you cannot use it within this time frame, you can convert it to capital loss carryover
Restriction - if capital gain exemption was used:
Lesser of:
BIL for the year
Cumulative apital gain deduction claimed in preceding years x a factor for that year (2)
What is the formula for the cumulative capital gains exemption?
Least of the three amounts:
1) unused lifetime deduction - in formula
2) A- B:
A = lesser of:
a) net taxable capital gains for the year
b) net taxable capital gains from the year on the disposal of farming, fishing, and WSBC shares
B = total of:
a) the amount by which net capital losses deducted exceeds a and b above
b) the allowable business investment losses realized in the year, claimed or not
3) Sum of all components of the annual gains for the current and prior years (without adjustments) reduced by:
a) sum of all capital gains deductions claimed in the prior year
b) cumulative net investment loss (CNIL) balance at the end of year
What does 2 (annual gains limit) do?
Essentially, it limits that you cannot claim a reduction on capital gains twice
What does the cumulative gains limit do (3)
The CNIL balance limits the capital gains deduction to the extent that the taxpayer has deductd their passive investment losses.
CNIL includes:
rental losses
interest and other carrying charges with earning investment income
net capital losses carried over and deducted against net taxable capital gains of the carryover year that were not eligibiel for deduction
Investment realted income = property inocme, and net capitla gains on property not eligble for capital gains deduction.
CNIL creates a “hole” that limits the avaliability of LCGE.
It can be filled in with tax planning
