Module 6: Capital gains and losses - PD Net

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You may recall another reserve under paragraph 20(1)(n), which you studied in the calculation of business income (Topic 3.4). Do not confuse the reserve for proceeds outstanding for business income with the section 40 reserve where you are calculating a gain. This distinction highlights for you the importance of understanding what type of property you are dealing with to determine the correct tax consequences. Activity 6.3-2 — Taxable capital gains reserves In this activity, you calculate the capital gains reserve for a property. Donations of capital property Where a taxpayer directly gifts certain capital properties to a registered charity or other qualified donee [as defined in subsection 149.1(1)], the taxable capital gain is zero per paragraphs 38(a.1) and (a.2). Where a taxpayer directly gifts certain securities to a private foundation, the taxable capital gain is also zero per paragraphs 38(a.1) for gifts subsequent to March 18th, 2007. Finally, where a taxpayer directly gifts certain exchangeable securities to charity or other qualified donee, the taxable capital gain is zero under certain conditions (for gifts subsequent to February 25, 2008). Investments that are eligible for this tax treatment include shares, bonds, bills, warrants, futures, and exchangeable shares. Mutual funds may also qualify. This will only benefit a taxpayer when the donation of the capital property is made directly to the qualified donee. If the capital property is sold and the proceeds donated to the donee, the zero inclusion rate will not apply. If there is no accrued gain on the capital property, donating shares will have the same result as donating cash. file:///F|/Courses/2010-11/CGA/TX1/06course/m06t03.htm[11/10/2010 4:41:58 PM]
Course Schedule Course Modules Review and Practice Exam Preparation Resources 6.4 Specific provisions for capital gains and losses Learning objective Describe specific rules that apply in the calculation of capital gains and losses, including the treatment for identical properties and depreciable property, and the restrictions on the deduction of capital losses for personal-use property, listed personal property, superficial losses, and business investment losses. (Levels 1 and 2) Required reading Optional reading LEVEL 1 Text: 7,210 to 7,220; 7,270 to 7,285; 7,710; 8,200; 8,300 (Level 1) ITA: 3(b), 39(1)(b), 41(1) and (2), 46(1), 47(1), 111(1)(b) (Level 1) ITA: Definitions, 111(8): net capital loss (Level 1) Text: 7,330 to 7,340; 7,710 (review); 7,720 (Level 2) ITA: 3(d), 38(c), 39(1)(c), 40(2)(g), 50(1), 53(1)(f) (Level 2) ITA: Definitions, 54: superficial loss (Level 2) ITA Definitions, 248(1): small business corporation (Level 2) IT: 387R2 (Consolidated), 484R2 Personal-use property and listed personal property In order to achieve neutrality, the tax system should not differentiate between business and investment decisions. Whether a taxpayer invests his discretionary savings in common shares, a boat, or a piece of art, tax rules should not favour certain types of investments. If gains on personal-use property (PUP) and listed personal property (LPP) were not taxed, taxpayers who choose to invest in income-producing property would be penalized, while individuals who invest in personal property could end up with a tax-free increase in wealth. A broader tax base for the taxation of capital gains supports the neutrality objective. The overall intent of the taxation of capital gains is to tax economic income, regardless of the type of property held. The text refers to a minimum amount of $1,000 as the deemed cost and proceeds of disposition applicable to personal-use property, including listed personal property dispositions. This is known as the de minimus rule. Example 1 Jody Wyatt bought a used motorcycle for $1,800. What is her taxable capital gain if she sells it for Solution a. $500 b. $2,000 Under the ITA, the calculation of both the gain (called a "net gain") and the taxable portion of the net gain (called a "taxable net gain") for listed personal property are found in subsections 41(2) and 41(1) respectively, rather than in sections 39 and 38. Note that clause 3(b)(i)(B) brings the taxable net gains from LPP for the year into income separately from taxable capital gains from the disposition of other property. Other allowable capital losses can be used to file:///F|/Courses/2010-11/CGA/TX1/06course/m06t04.htm[11/10/2010 4:41:58 PM]
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Module 6: Capital gains and losses - PD Net

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