Module 6: Capital gains and losses - PD Net

taxpayer motivation is also a factor. Taxpayers generally prefer capital gains with a 50% inclusion rate
compared to other types of income included at 100%.
Disposition
Capital gains and losses are not taxed on an accrual basis. As the tax on the gain is deferred until the gain is
realized, a tax preference occurs, allowing taxpayers to take advantage of the time value of money. This
realization rule has its downside since, in the year the gain is realized, there is a "bunching up" in income, of
past years' accrued gains. Therefore, the gain may be taxed at a higher rate of tax than if the accrued gains
had been taxed on a yearly basis.
An advantage of the realization basis is that it allows taxpayers to control the timing of the gain. For example,
taxpayers may decide to sell capital property on which a substantial gain has accrued in a taxation year in
which they incur losses in order to reduce the tax liability on the gain.
The realization basis is introduced in the ITA by providing that capital gains are taxed when a "disposition"
occurs, as confirmed by the opening words of paragraph 40(1)(a). Therefore, it is very important to have a
good knowledge of what constitutes a disposition in order to be able to recognize when a capital gain becomes
taxable and, if possible, to control the timing of the taxation of the capital gain.
To understand the extent of the first item in the definition of "disposition" in section 248(1), you must review
the definition of "proceeds of disposition" in section 54. It then becomes clear that a disposition includes not
only voluntary dispositions, such as a sale of property, but also involuntary dispositions such as its
expropriation, damage, destruction, or loss when the taxpayer receives compensation. A disposition can also
occur when a creditor takes a property in payment of a debt.
The definition in section 54 is not exhaustive (note the use of the word "includes" in the definition), which
means that a disposition may occur in situations not mentioned, such as when property is destroyed and there
is no compensation. In order to prevent the indefinite postponement of the taxation of capital gains, several
provisions of the ITA deem a disposition to occur if a specified event occurs, even though the property is not
really disposed. Section 7,020 of the text provides some examples of deemed dispositions for tax purposes
along with the corresponding ITA provision.
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