Chapter 9: Advanced Tax Concepts Flashcards
What must you first calculate to calculate the capital gain on the disposition of capital property?
The adjusted cost base (ACB)
What factors go into the calculation of the ACB for a piece of property?
- Purchase price
- Contribution of capital
- Sales charges
- Costs of acquisition
- Distributions of investment returns
- Other non-deductible costs
What does a “contribution of capital” refer to when discussing the ACB of a capital property?
When a taxpayer injects capital into a corporation and receives shares in exchange. The amount of money injected would add to the ACB of the shares received.
Is land transfer tax and fees paid to a lawyer deductible?
No, neither are deductible. They increase the ACB of the property.
How are repairs to a rental property treated for tax purposes?
Any costs that are not deductible would increase the ACB. Repair or replacement with a similar item (such as replacing carpeted floors with a similar surface) would be deductible, but replacing carpet with hardwood floors would not be.
What is the general formula for calculating ACB?
ACB = purchase price + sales charges + acquisition costs
When did capital gains become a taxable event in Canada and what is that day known as?
January 1, 1972. Known as valuation day.
What are the de minimus rules?
If the value of Personal Use Property (PUP) or Listed Personal Property (LPP) is below $1000, the ACB is assumed to be $1000.
What is Listed Personal Property?
Property that might have been purchased for personal use but could also have a collectible application (such as stamp, coin collections, antique furniture, etc.)
What are “identical properties” and how are these treated with respect to the calculation of ACB?
Primarily mutual fund units or shares of a company. ACB is averaged across all property owned. This is done to prevent investors from manipulating capital gains/losses by cherry picking which investments to sell.
Calculate the ACB:
In 2005, Paula bought 100 shares of RBC for $40 each + $30 commission. She bought a further 100 shares in 2006 for $50 each + $30 commission. In 2009, she bought her final shares for $30 each + $30 commission.
(100 x 40 + 30) + (100 x 50 + 30) + (100 x 30 + 30) / 100 + 100 + 100 = $40.30
What is the superficial loss rule?
Prevents investors from manipulating capital gains by selling shares with at a loss and then subsequently buying them back within 30 days to create a capital loss to offset capital gains on another investment.
If selling Stock A would create a $20 loss that could offset a $20 gain on Stock B, you cannot sell Stock A and then buy it back shortly after to take advantage of the loss.
What is the Alternative Minimum Tax (AMT)?
Prevents high income earners and trusts from paying little to no tax as a result of tax incentives. Certain deductions will trigger the AMT calculation.
What are AMT triggers?
Alternative minimum tax calculation triggers include:
- Certain CCA deductions
- Losses arising from investments in tax shelters or limited partnerships
- Resource expenditures and losses
- Flow-through shares
- Resource royalty income
- Capital gains
- Employee stock options
- Dividend income
- Labour sponsored funds tax credit
- Foreign investment income
- Foreign employment income
- Allowable business investment loss
What is the Lifetime Capital Gains Exemption?
Allows a taxpayer to incur up to $800K (indexing starting in 2014) of qualifying capital gains on a tax-free basis.
How much income is exempted from the AMT calculation to ensure only high income earners have to deal with it?
The first $40K of income.
What is the AMT inclusion rate for capital gains?
80%
At which tax rate is the AMT calculation based on?
The lowest marginal rate (ie. 15%), no matter how much income the taxpayer has.
What is the AMT credit?
Individuals who pay AMT tax have the ability to claim a tax credit over the next 7 years to recover AMT paid. Must have income to claim the credit or else it is lost.
Is AMT triggered in the year of death?
No.
What qualifies as a non-arm’s length relationship?
- Spouse or common-law
- Child
- Sibling
- Corporations
- Partnerships
- Trusts
- Other relationships can fit in this category if a manipulation of the tax system is occurring (example: your neighbour could qualify as non-arm’s length if you are manipulating the system with that neighbour)
Are nieces and nephews considered arm’s length or non-arm’s length parties?
Arm’s length.
What is attribution of income and when does it occur?
Income will be attributed back to a taxpayer when the taxpayer shifts income to another with the sole or primary purpose of reducing taxes.
Which factors should be considered to determine whether there will be an attribution of income?
- Relationship between the parties
- Tax savings generated
- Active or passive income
- Source of funds