Chapter 10

Capital Gains And Losses

 Economic Background
 Capital Assets And
Taxation Policy
 Changes In Policy
 1972 Taxation Begins
 1985 Lifetime Capital
Gains Deduction
 1988 Increase in Taxable
Component
 1994 Lifetime Deduction
Killed
 2000 Back To 1/2 Taxable
© 2007, Clarence Byrd Inc. 2
 General Rules
 Capital Gains Defined - ITA 40(1)(a)(i)
Proceeds Of Disposition $100,000
Less:
Adjusted Cost Base $55,000
Costs Of Disposition     6,000 61,000
Capital Gain $
39,000
Inclusion Rate
1/2
Taxable Capital Gain $
19,500

© 2007, Clarence Byrd Inc. 3

 Dispositions
 Sale
 Redemption
 Expiry
 Cancellations
 Conversion
 Transfers To Trusts
 Expropriations
 Various Deemed
(e.g., Change In
Use)
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 Proceeds Of Disposition
 Sale And
Redemption
Proceeds
 Insurance Proceeds
 Expropriation
Proceeds
 Various Deemed
Proceeds

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 Adjusted Cost Base
 Defined
 Depreciable Assets = Capital Cost
 Non-Depreciable = Cost, Adjusted For
ITA 53

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 Adjusted Cost Base
 Government Grants (Including
ITCs)
 ITA 53(2)(k)
 Deducted From Cost Or UCC

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 Adjusted Cost Base
 Negative Amounts
 ITA 40(3)
 Add To Income
(Capital Gain)
 Restore ACB To Nil

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 Adjusted Cost Base
 Superficial Losses - ITA
54
 30 Days Before
 30 Days After

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Superficial Loss Example
 Securities with an adjusted cost base
of $15,000 are sold for $10,000.
Identical securities are purchased for
$8,000.

POD $10,000
ACB ( 15,000)
Disallowed Loss - ITA 40(2)(g)(i) ($ 5,000)

ITA 53(1)(f) = New ACB ($8,000 + $5,000) =

$13,000
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 Detailed Applications
 Identical Properties
An individual purchases 100 shares of X
Ltd. at $12 per share, 150 shares at $14
per share, and 75 shares at $11 per share.
At a later point in time, 100 shares are
sold at $20 per share.
Sale Proceeds
$2,000
ACB ($4,125 ÷ 325) = $12.69(100)
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 Detailed Applications
 Partial Dispositions
 Allocate ACB On A Reasonable Basis
 Land On Acres, Unless Other Factors

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 Detailed Applications
 Warranties
 On The Sale Of A Capital Asset –
Payment Included In Capital Gain
 Costs Become A Capital Loss

© 2007, Clarence Byrd Inc. 13

 Capital Gains Reserves
 All Of The Proceeds Of Disposition Will Not
Be Received In Cash In The Year Of The
Disposition

ITA 40(1)(a)(iii) limits the reserve to the

lesser of:

 [(the total gain)(the proceeds not receivable

until after December 31 of the current year /
the total proceeds)]

 [(20% of the total gain)(4, less the number of

preceding taxation years after the disposition)]
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 Detailed Applications
 Bad Debts
On Receivable Related To The Sale Of
Capital Assets - Included In Capital Gain
Write-Off Treated As A Capital Loss

© 2007, Clarence Byrd Inc. 15

Deferral Provisions On
Replacement Property

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 Deferral Provisions On
Replacement Property
 Involuntary Dispositions
A building with an adjusted cost base of $700,000 and a
UCC of $250,000 is destroyed in a fire. The insurance
proceeds are equal to the fair market value of the building
which is $2,000,000. The building is replaced at a cost of
$2,500,000.
 No Election
 Capital Gain = $1,300,000
 Recapture = $450,000
 With Election
 No capital gain or recapture
 New Capital Cost = $2,500,000 - $1,300,000 = $1,200,000
 New UCC = $1,200,000 - $450,000 = $750,000

© 2007, Clarence Byrd Inc. 17

 Deferral Provisions On
Replacement Property

 Involuntary Dispositions

Election: Can Allocate POD

Between Land And Buildings In
Any Way You Wish

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 Deferral Provisions On
Replacement Property

 Voluntary Dispositions
 Applicable To Former Business Property
 Real Estate Only

 By End Of First Year After

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 Deferral Provisions On
Small Business Investments
 Eligible Small Business
Investments
 New Investment In Common
Shares
 Investee Must Be Small
Business Corporation
 Permitted Deferral Subtracted
From ACB Of Replacement
Shares

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 Deferral Provisions On
Small Business Investments
 Formula = (A / B)(C)
 Where:
 A = Total Cost Of All Eligible Small Business
Investments (Not Greater Than $500,000)
 B = POD Related To Eligible Gain

 C = Eligible Gain From Disposition

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 Deferral Provisions On
Small Business Investments
 During October, 2007, John disposes of shares in
an eligible small business investment for
proceeds of $850,000. The adjusted cost base of
the shares was $450,000. In January, 2008, he
acquires shares in a new eligible small business
investment at a cost of $600,000.

 Eligible Gain = $850,000 - $450,000 = $400,000

 Deferral = ($600,000/$850,000)($400,000) = $282,353

 ACB of new investment = $600,000 - $282,353 =

$317,647
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 Changes In Use
 Basic Rules
 Business To Personal – Deemed
disposition/reacquisition at FMV

 Personal To Business – Deemed

disposition/reacquisition at FMV
 Exception if FMV > Capital Cost
 For CCA and recapture use old capital cost, plus
one-half of the excess of FMV over that cost

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 Changes In Use
 Example: A sailboat with a cost
$200,000, UCC of $125,000 and a
fair market value of $250,000.
 Business To Personal
 Capital Gain = $50,000
 Recapture = $75,000

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 Changes In Use
 Example: A sailboat with a cost
$200,000 and a fair market value of
$250,000.
 Personal To Business
 Capital Gain = $50,000
 New UCC = $225,000

 Capital Cost = $250,000

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 Special Assets –
Principal Residences
 Defined ITA 54 And
IT-120R3
 Designated - T2091
 Designation At Sale
 No Net Gain
Reported At Sale

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 Special Assets –
Principal Residences
 Example: On January 1, 2003 House A was
purchased for $140,000. It was sold on June 30,
2005 for $160,000. At this time House B was
acquired for $170,000. House B is sold on
December 31, 2008 for $200,000.

A: $20,000 (3/3) = $20,000

B: $30,000 (3+1)/4 = $30,000

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 Special Assets –
Principal Residences
 One Principal Residence Per Family
Unit
 Only 1/2 Hectare Of Land

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 Special Assets –
Principal Residences
 Election Under ITA
45(3)
 Buy Property
 Rent – Later
Becomes Principal
Residence
 Can Treat As
Principal Residence
For Up To Four
Years Prior To Move
– No Change In Use
With Move
 Can’t Take CCA
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 Special Assets –
Principal Residences
 Election Under ITA
45(2)
 Can Elect To Have No
Change In Use On
Personal To Business
 Remains Residence For 4
Years
 More Years If Employer
Requires Move
 Defers Taxation Until
Time Of Sale – May Be
Eligible For Exemption
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 Special Assets –
Personal Use Property
 Used Primarily For
Enjoyment Of The
Taxpayer
 How Is It Taxed?
 Gains Taxed
 Losses Non-Deductible

 Minimum POD =
$1,000
 Minimum ACB =
$1,000

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 Special Assets –
Listed Personal Property
 What Is It?
 Works Of Art
 Jewellery
 Rare Books
 Stamps
 Coins
 How Is It Taxed?
 Gains Taxed
 Losses Against Other
LPP Gains
 $1,000 Rule

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 Gains And Losses On
Foreign Currency

 Income Transactions
 Any GAAP Method
 Must recognize gains and losses as they
occur

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 Gains And Losses On
Foreign Currency

 Financing Capital Transaction

 Gain or loss only when debt is repaid
 Differs from GAAP

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 Gains And Losses On
Foreign Currency

 Purchase or sale of capital assets

 Gain or loss when foreign funds
converted to Canadian dollars or
another foreign currency
 Gain or loss at time of purchase

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 Options
 If Sold
 Issuer - Proceeds
Treated As A Capital
Gain At Sale
 If Exercised
 Issuer - Price Becomes
Part Of POD, Original
Gain Is Eliminated
 Purchaser – Added To
ACB
 If Expired
 Issuer – No Further Tax
Consequences
 Purchaser – Capital Loss
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 Capital Gains And Tax
Planning

 Timing Is
Discretionary

 Losses Are A
Problem

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 Input Tax Credits
 Capital Personal Property
 Use In Commercial Activity
 More Than 50%, ITC For All
GST Paid
 50% Or Less, ITC = Nil

 Capital Real Property

 Use In Commercial Activity
 More Than 90%, ITC For All
GST Paid
 Between 10% And 90%, ITC
Prorated Based On Usage
 10% Or Less, ITC = Nil
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 Sale Of Capital Real
Property - Exemptions
 Sale Of Used
Residential Units
 Sale Of Personal Use
Property
 Certain Sales Of
Farmland
 Sale And Rentals Of
Real Properties By
Charities, Not-For-
Profits, And Other
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 New Housing Rebate

[A][($450,000 – B) ÷ $100,000]
Where:
A = The lesser of 36 percent of the
GST paid and $7,560
B = The greater of $350,000 and the
cost of the home

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 New Housing Rebate -
Example
On July 1, 2007, Gary and May Lartch acquire a
new home at a cost of $385,000. GST paid was
$23,100 (6%)

Rebate =
[$7,560][($450,000 - $385,000) ÷ $100,000 =
$4,914

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