Ch. 12 - Capital Gains/Losses

Question 1

Business vs capital income criteria:

Answer 1

Primary Intention
1. was it intended to use capital or resold
Secondary Intentions
1. relationship of the transaction to the taxpayers business
2. Nature of the asset
3. Number and frequency of transactions
4. Length of period of ownership

Question 2

Business vs Capital Income - Special Rule for Disposition of Canadian Securities

Answer 2

• may make an election to be treated as capital, no matter the intentions, except for:
  1. a trader or dealer in securities
  2. a financial institution
  3. a corp whos main business is lending money
  4. a non-resident

Question 3

Capital gain/loss vs taxable capital gain/loss

Answer 3

capital gain/loss is the full amount

taxable capital gain/loss is the full amount vs inclusion rate

Question 4

capital losses:

1. deducted against
2. carry rules

Answer 4

1. can only be deducted against capital gains

2. can be carried back 3 years or can be carried forward indefinitely

Question 5

Treatment of expenses on dispositions

Answer 5

• expenses are deducted from the capital gain/loss

Question 6

Deemed dispositions occur when:

Answer 6

1. change in use of property
2. death of a taxpayer
3. Ceasing to be a resident of canada
4. gifting of property to another person

Question 7

Special rule for allocation of selling price between a building and land

Answer 7

• If the allocation results in a terminal loss on building and a capital gain on the land, there will be a reallocation to reduce the terminal loss

Question 8

What happens when options:

• are exercised
• expire

Answer 8

• if exercised, the stock is acquired at strike price

- if expired, the amount is a capital loss

Question 9

Options:

1. what happens in year its granted
2. what happens in year it expires
3. what happens when exercised

Answer 9

1. in the year it is granted, it is considered a capital gain
2. in the year it expires, it is considered a capital loss
3. if the option is exercised in a subsequent year to granting, an amendment should be done to remove the original capital gain from the granting

Question 10

What is included in the adjusted cost base (ACB)

Answer 10

any costs directly associated with acquiring the property

Question 11

A Superficial Loss

• how it occurs
• tax treatment

Answer 11

• arises when a taxpayer sells property to trigger a loss and repurchases almost immediately
• loss is denied and added to cost base (reducing future capital gain)

Question 12

Superficial loss criteria:

Answer 12

1. taxpayer, spouse, or corp controlled by either sells a property
2. any of the above taxpayers acquires or reacquires the same property or an identical property within 30 days of sale
3. Any of the above taxpayers above still own the property originally sold within 30 days of original sale

Question 13

Identical properties

1. how costed
2. how measured

Answer 13

1. a floating weighted average method is used

2. total price paid for all properties divided by total number of properties

Question 14

Capital Gains Reserve: calculation

Answer 14

reserve is the lesser of two amounts:

1. capital gain x (proceeds not due / total proceeds)
2. 20% of capital gain x (4-number of preceding years after disposition)

Question 15

Capital Gains Reserve: Income included each year

Answer 15

1. in year of sale:
   ([capital gain - reserve] x capital gains inclusion rate)
2. in each year after sale:
   ([prior year reserve - current year reserve] x capital gains inclusion rate)

Question 16

Business Investment Losses:

• how the occur
• what is a small business corp
• deductibility

Answer 16

• loss on investment in a small Canadian business
• small business corp:
  1. CCPC where 90% or more of assets are used in an active business, primarily in Canada
• deductibility: in YOL deductible against all income; carried back 3 or forward 10 against any income; changes to capital loss after 10 years forwards