Chapter 7 Capital Gains PDF

Chapter 7 Capital Gains  Any depreciable property, and Capital Property is defined as: Capital Any other property that...

Chapter 7 Capital Gains  Any depreciable property, and Capital Property is defined as: Capital Any other property that would result in a capital gain Property – or loss upon disposition Defined Property of any kind… and… (ITA 54) Property is defined as: includes… a right… a share or a chose in action. Capital property is referred to as an asset that provides the owner with a long-term and enduring benefit 2  Distinction between the two sources is important: Business Capital Income Business transactio Business versus losses can n have income offset Capital preferenti fully other al taxable. income. treatment. 3  Capital treatment can be distinguished from Intended Use business treatment by employing the following guidelines: X Acquired for Acquired for Long-term resale Benefit Capital Business treatment treatment Sometime difficult to determine primary intention. 4  Relationship to taxpayer’s business Badges of Circumstanc Nature of es causing the disposal. the asset Trade: Evidence Evidence of Supplement Number and Intended Use al work on or in connection frequency of transaction in a given with the period property Length of ownership of the asset 5  History of the Taxation of Capital Gains Inclusion rates over time Time Period Inclusion Rate 1972 to 1987 50% (1/2) 1988 and 1989 66 ⅔% (2/3) 1990 to February 27, 2000 75% (3/4) February 28 to October 17, 2000 66 ⅔% (2/3) After October 17, 2000 to June 24, 2024 50% (1/2) On or after June 25, 2024 50% (1/2) or 66 ⅔% (2/3) 6  Terminology 100% 50% Capital gain (CG) Taxable capital gain (TCG) Capital loss (CL) Allowable capital loss (ACL) Business investment loss (BIL) Allowable business investment loss (ABIL) Capital gains exemption (CGE) Capital gains deduction (CGD) 7  Inclusion rate is dependent on the taxpayer: 66 2/3% (2/3) for all capital Corporations and Trust transactions on or after June 25, 2024 50% (1/2) for those with net capital Change gains in the year up to $250,000, and Individuals proposed in 66 2/3% for the net capital gains over the $250,000 threshold April 16, 2024 Federal Budget: Current-year capital losses, $250,000 threshold is Capital losses from other years any capital gains in applied in the year, and the year, net of: Capital gains in the year where a claim was made for the: LCGE, proposed EOTE or CEI. 8  Terminology Accounting Income Tax terminology terminology Selling Price $xx Proceeds of Disposition (P of D) Sec. 54 Cost $x Adjusted Cost Base (ACB) Sec. 54 x Selling costs (xx) Expenses of disposition Ssec. 40(1) xx Profit (Loss) $xx Gain (loss) (xx) Exemption or reserve, if any Sec. 40 $xx Capital gain (CG) or Capital loss (CL) Sec. 39 $xx Taxable capital gain (TCG) or Allowable capital loss (ACL) Sec. 38 9  Capital Property 10  ITA 54 - A disposition of property occurs when: Dispositi ITA 39(1) - Capital on and Gains Property is Involuntary disposition - theft, A share, bond, etc. is cancelled, Share converted by Deemed Disposition (losses) sold; destruction, amalgamatio Proceeds redeemed, or or n or merger. settled; or, only expropriation; On change in use recognized of of property when a disposition Dispositi On death of a taxpayer occurs. on By way of gift during the lifetime of a taxpayer When taxpayer ceases to be a resident of Canada 11  Allowable capital loss only deductible Carryovers: against taxable capital gain, and Capital losses on taxable net gains depreciable Capital from listed personal Carried back three property is denied property, to the Losses extent needed to bring those gains years to zero Carried forward indefinitel y 12  General Rules Capital Gain/ Proceeds ACB + Expenses (Capital loss) = of - of Disposition Disposition 13  Selling Dispositio Sold P of D = Price n and Proceeds Property FMV of P of D = property of Exchange received Dispositio n Involuntar P of D = Amount y Received 14  ITA 69(1)(b) - Gift: P of D = Fair Market value (FMV) at time of sale. No (Chapter 8) actual ITA 45(1) - Change in use: P of D proceed = FMV at time of change. Deemed s but ITA 128.1 - Giving up residency: P of D = FMV when cease Canadian Disposition deemed Residency. (Chapter 8) to have ITA 70(5) - Death: P of D = FMV sold for: immediately prior to death. (Chapter 8) 15  original purchase price plus In other costs incurred, like: brokerage fees, mos installation costs, and Adjusted Cost t legal fees Interest on borrowed funds Base (ACB) case during the construction phase of a building s ACB is: +/- 16  The more common types of disposition costs are: Expenses of Expenses Dispositio incurred to fix-up Finders’ Brokers’ Surveyo Legal Transfer Advertisin the taxes, n fees, fees, r fees, fees, g costs. capital and property for sale, 17  If proceeds Capital Gain will result of disposition > Adjusted Recapture may Cost Base result Disposition of or No capital loss Depreciable If proceeds (denied) property of Recapture may Disposition < result Adjusted Cost Base Terminal Loss if last asset in pool 18 Disposition of Proceeds $100 Capital Gain Depreciable Capital cost $60 Property Recapture UCC $20 Recapture/ Terminal CG Loss Proceeds $100 UCC $20 Cost (60) LOCP (60) Capital $40 Recapture $40 Gain 19 Disposition of Capital cost $60 Depreciable Proceeds $50 Property Recapture UCC $20 Recapture/ Terminal CG Loss Proceeds UCC $20 Cost LOCP (50) Capital N/A Recapture $30 Gain 20 Disposition of Capital cost $60 Depreciable UCC $20 Property Terminal loss Proceeds $5 Recapture/ Terminal CG Loss Proceeds UCC $20 Cost LOCP (5) Capital N/A Terminal $15 Gain loss 21  Property used primarily for personal use or enjoyment Taxpayer’s Taxpayer’s Gains: Losses: May cost proceeds Subject to not be deemed to deemed to tax deducted be greater be greater Personal- Use of: of: Property ACB of the Actual (PUP) property proceeds $1,000 $1,000 22  Special subset of PUP Capital losses can be used but only to extent of LPP gains Listed Carryover (three years back and seven years Personal forward) only against LPP gains (applied under Div. B not Div. C) Property (LPP) Net LPP LPP Gains capital LPP capital on LPP losses Capital losses in from Gains in the Division other year B years 23  Subset of PUP that has some element of investment value – ITA 54. Includes: A print, Listed etching, Personal drawing, painting, A rare Property or folio, rare sculptur Jewellery manuscri A stamp A coin (LPP) e, or pt, or other rare book similar works of art 24  Gain on principal residences can be exempted Taxpayer must designate home as Principal “principal residence” for specific years Any residence may be a principal Residence residence as long as taxpayer Exemption ordinarily inhabits the home, even for a short time Only one residence can be designated for a given year Disposition must be reported on individual’s tax return 25  Reduction Formula ITA 40(2)(b): 1 + # Yrs. Designated Principal Residence X Gain Principal Number of Years Owned Residence The “+1” is included to cover the year in which two houses are owned as a result of the normal process of selling one house and acquiring a new one. 26  (a) How many properties are being sold in the year, Steps to minimizing tax on the (1) Assess the Situation and Identify the Issues: (b) The year of purchase for disposition of Gather the following each property, two or more information: residences: (c) The proceeds of Step 1 disposition and adjusted cost base for determining the capital gain. 27  (i) The number of years available to allocate amongst the properties, Steps to (a) Based on the information gathered, determine: minimizing tax (ii) The capital gain per year for each on the principal residence. disposition of (i) Allocate the remaining years to the two or more (b) Calculate the principal residence property with the next highest gain per year, until all the available years are used. residences: exemption by allocating the maximum number of years to the property with the highest capital gain per year to reduce Step 2 – that capital gain to nil. (ii) Remember to allocate at least one year to each property to ensure each is eligible for Analyze the (c) Deduct the principal residence exemption from the capital gain of each the 1+ rule. issue: property to determine the total capital gain that must be included in the taxpayer’s income. 28  Change from personal use to income- producing or from income-producing to personal use May designate home as principal residence for up to four years Change in Income Tax Folio S1-F3-C2 — Principal residence Use of a Principal Section 54.1 – Extended designation Residence Principal residence exemption – transfer between spouses Single-ownership situations Joint ownership situations 29  “Floating weighted-average method” for identical assets aggregat by the Stock- e costs of number Floating the of such Weighted identical identical Average propertie propertie cost s s. (Principal Others - aggregate amounts of all Pooling of Floating costs of identical properties Weighted the Principal Average identical amount of cost properties property Identical disposed of) Certain securities are exempt from cost-average Assets rule by deeming such securities not to be identical to any other securities acquired by the taxpayer and include: Securities acquired under an employee option agreement Employer shares received by an employee as part of a lump-sum payment on withdrawing from DPSP 30  Taxpayer is allowed to designate the particular security being disposed of if: Security is acquired under an employee stock option agreement Disposition occurs no later than 30 days after the taxpayer acquires the Disposition of Dispositio particular security No other acquisitions or dispositions Shares n of newly of identical securities in the Acquired under acquired intervening period Taxpayer must make the a Stock Option securities designation in the tax return that is filed for the year in which the designation occurs Taxpayer does not designate the particular security in connection with the disposition of any other security 31  ACB of shares acquired under a Disposition of stock option Shares Acquired Employment benefit Under a Stock Employment benefit included in ACB from that taxpayer is Option deemed to have the time of acquisition until taxpayer received is added to disposes of the the ACB security 32  Taxpayer may not receive full proceeds in year of disposition Deferral of portion of gain realized available through claiming a reasonable reserve Capital Gains Reserve is lesser of: Reserve a) Proceeds not yet due Total proceeds × Gain = Reasonable Deferred reserve Proceeds b) (1/5 of Gain) × (4 – # of Preceding taxation years Year 1 – 80% ending after disposition) Year 2 – 60% Year 3 – 40% Year 4 – 20% Year 5 – 0% 33  Taxpayer denied loss at the time of disposition but can add the superficial loss to the ACB of substituted property Superficial loss occurs when: Superficial Losses Taxpayer or “affiliated person” disposes of property; Taxpayer or affiliated person acquires or reacquires the same or identical property during the period beginning 30 days before the disposition and ending 30 days after the disposition; and Taxpayer or affiliated person, at the end of the period above, still owns at least some of the property. 34  Conversion is deemed not to have been a disposition of property Convertible Properties ACB of shares = No cash ACB of consideration can convertible be received property 35  Individuals can defer recognition of capital on certain small business investments Capital Gains Deferral Must use proceeds from the sale of small Deferred gain business investment reduces ACB of new to acquire other small investment business investments 36  Debts Seller can elect to have disposed of the debt and to have reacquired Established it immediately at a cost of nil. To Be Bad Result: Capital loss to offset gain on Debts disposition of property represented in the debt. 37  Business Investment Loss Advance Replaceme Advanced Election on change in d nt Property: Voluntary Provision Provisions use s and Involuntary Reallocation of proceeds 38  “Business Investment Loss” includes capital losses arising from the disposition of shares and debts Advanced of a small business corporation” (SBC) Business investment losses (BILs) are a subset of capital losses Provision: Business ABILs determined using the same Investment inclusion rates as allowable capital losses Losses (BIL) Portion of BIL is disallowed if capital gains deduction previously claimed 39  Advanced Provisions: BIL - Treatment 40  Basic deferral of some or all of the capital gain on property which is disposed of and subsequently replaced. Advanced Provisions: Involuntary Replacement Two types of Property disposition: Voluntary 41  Recognize the usual capital gain; or In year of Advanced disposition, a Actual capital taxpayer may gain in (a), and Provisions: choose to either: Elect to report Replacement capital gain as the lesser of: Excess, if any, of Property proceeds for the old property over the cost of replacement. 42  To qualify for this election, the property must be Advanced replaced: Provisions: Replacement Involuntary disposition – by Voluntary disposition – by Property later of the end of the first later of the end of the second taxation year after the year taxation year after the year of proceeds considered of disposition and 12 months receivable and 24 months after the end of the year of after the end of the year of disposition; and disposition. 43  Full amount of gain deferred if: Proceeds of Purchase of ≤ old property replacement property Advanced Full amount of recapture deferred if: Provisions: Replacement Potential ≤ Purchase of Property recapture replacement property 44  Advanced Provisions: Reallocation of Proceeds– Special Considerations Only applies when there is a capital gain on land Special rules and a terminal loss on a building exist when Rule prevents manipulation of the allocation of proceeds land and between the land and the building to maximize a terminal loss on building (fully deductible) and minimize building are a capital gain on land (50% taxable) sold in the Tax rules (ITA 13(21.1)) require reallocation of same year: proceeds between the land and the building if there is a capital gain on land and terminal loss on building 45  Advanced Provisions: Reallocation of Proceeds– Special Circumstances St Calculate the tax consequences of the sale of e the building and land with the original proceeds of disposition. p 1 St If the sale of the building results in a terminal loss and the sale of the land results in a e capital gain – a reallocation of proceeds is p required. 2 46  Advanced Provisions: Reallocation of Proceeds– Special circumstances Reallocation of Proceeds: IF the capital gain on IF the terminal loss on land > terminal loss on building > capital gain building: on land: reduce the capital reduce the terminal gain on land by loss on building by terminal loss on capital gain on land building 47  On change in use of property, deemed to have sold property at FMV and reacquired same property at FMV (new ACB) Advanced Provisions: If dual use, cost must be Change in apportioned between uses. Use If percentage changes, proportionate deemed disposition 48  Advanced For personal-use property only, election to defer capital gain until Provisions: taxpayer: Election on Decides to Is deemed to Decides to Change in dispose of dispose of rescind the Use asset; asset; or election. 49  If foreign exchange If foreign exchange gain/loss from an Advanced income receipt, then gain/loss from a capital receipt, then net capital full gain/loss included in Provisions: business/property gain/loss calculated in normal manner. income Foreign Exchange For individuals, Gains and net capital gain/loss is Losses reduced by a max. $200 50