Module 6: Capital gains and losses - PD Net

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Self-test 6 solution 2
a. Since both the cottage and the house were purchased in 1987, only one of the properties may
be designated as the principal residence of the family unit. The capital gain on the designated
principal residence will be tax-exempt, by virtue of the principal residence rules [paragraph
40(2)(b)]. One-half of the capital gain arising on the other property would normally be taxed at
the marginal tax rate of the owner (Irene or Alf).
b. The adjusted cost base (ACB) of any lottery prize is deemed by subsection 52(4) to be its fair
market value. In Martin’s case that is $32,000. Since Martin’s proceeds of disposition of the Land
Cruiser is equal to that ACB, he does not realize a capital gain. There is no capital gain on the
lottery winning itself as paragraph 40(2)(f) deems that lottery winning gains are nil.
c. The income earned on the disposition of gold represents an adventure or concern in the nature
of trade. Since gold does not have any income earning ability, any increases in value represent
gains from holding inventories of commodities. Therefore, any gains or losses are on account of
income and not capital. However, Sacha may have already elected (see IT346R) to treat her
commodity investments as capital, in which case the gain is a capital gain. The allowable capital
loss of $1,500 ($3,000 × 1/2) may only be offset against taxable capital gains. Thus, this amount
becomes a net capital loss, and is eligible for a carryback of three years, and/or an indefinite
carryforward. If Sacha has elected capital treatment on the gold, then $150 of the loss can be
used to reduce her capital gain to zero, and the remaining $1,350 becomes a net capital loss.
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