Module 6: Capital gains and losses - PD Net

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)
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