Module 6: Capital gains and losses - PD Net

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Course Schedule Course Modules Review and Practice Exam Preparation Resources Self-test 6 solution 11 The taxation of only 1/2 of capital gains increases the after-tax yield of capital investments and encourages this type of investment. In addition, investments in qualified small business corporations and qualified farm or fishing properties are encouraged further by allowing a capital gains deduction, provided certain provisions in the ITA are met, whereby $750,000 of capital gains may be entirely sheltered from taxation. The tax treatment of losses on shares and loans of small business corporations as ABILs, which are deductible against all sources of income, reduces the risk of these investments and encourages investment. Gains are only taxed when realized and then only when proceeds are received, subject to gains reserve restrictions. Therefore, investment is encouraged, as there is no premature taxation of gains. file:///F|/Courses/2010-11/CGA/TX1/06course/m06selftestsol11.htm[11/10/2010 4:42:08 PM]
Course Schedule Course Modules Review and Practice Exam Preparation Resources Module 6 summary Capital gains and losses This module begins with a review of why capital gains are subject to preferential tax treatment. Then, the basic concepts and rules for the recognition and computation of capital gains and losses are explained before discussing the specific rules in calculating capital gains and losses including the special treatment for identical properties and depreciable property, and restrictions on the deduction of capital losses and the special rules, such as those relating to the principal residence exemption, changes in use of a property including change in use of a principal residence and replacement property. Capital gains were not taxable before 1972. As part of the 1971 tax reform, it was decided to tax capital gains, not as income from a source, but under special rules. The preferential treatment of capital gains promotes investments, particularly in risky ventures, by giving the investor a potentially higher yield on investment. Capital gains are taxed when realized, and not on an accrual basis. There would be much difficulty in valuing all capital properties annually in order to determine accrued capital gains. The principal residence exemption stems from a presumption that no real economic gain is realized when a home is sold and another is purchased. The capital gains deduction on small business corporation shares, farm property and fishing property was introduced to encourage entrepreneurial risk taking and to support equity investments in large and small businesses, including farm and fishing businesses, by Canadians. Capital gains and losses occur on the disposition of property that is not: eligible capital property certain cultural properties Canadian and foreign resource properties insurance policies timber resource properties interest of a beneficiary under a qualifying environmental trust property in inventory Criteria acknowledged by the courts for distinguishing whether income from the disposition of a particular property is business income or a capital gain are: the primary intent the secondary intent the period of ownership the number and frequency of transactions the relation of the transaction to the taxpayer's business or expertise The general rules in the ITA for determining capital gains and losses are as follows: Section 40 calculates the gain or loss. Section 39 restricts properties on which a capital gain or capital loss can occur. Section 38 calculates the taxable or allowable portion used in the paragraph 3(b) income calculation. Section 41 calculates the taxable net gain for LPP used in the paragraph 3(b) file:///F|/Courses/2010-11/CGA/TX1/06course/m06summary.htm[11/10/2010 4:42:09 PM]
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Module 6: Capital gains and losses - PD Net

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