Module 6: Capital gains and losses - PD Net

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Course Schedule Course Modules Review and Practice Exam Preparation Resources 6.3 General rules for determining taxable capital gains and allowable capital losses Learning objective Calculate taxable capital gains, allowable capital losses, and the allowable capital gains reserve. (Level 1) Required reading LEVEL 1 Text: 7,110 to 7,125; 8,110; 8,130 (Level 1) Text: 7,910 (Level 3) ITA: 3, 38, 39, 40(1), (1.1), 40(2)(a), 53(1)(j), 53(2)(k) (Level 1) ITA: Definitions, 248(1): allowable capital loss, capital gain, capital loss, taxable capital gain (Level 1) ITAR: 20(1), 26(3) (Level 2) Capital gains and losses: General formula When you have determined that a disposition of a capital property has occurred, you must compute the taxable capital gain or the allowable capital loss. First determine the gain or loss in accordance with subsection 40(1), then follow section 39 to characterize the gain or loss amount as a capital gain, capital loss, or business investment loss, if none of the restrictions apply. For example, you cannot have a capital gain or capital loss on the disposition of eligible capital property nor can you have a capital loss on depreciable property. You then determine the taxable capital gain or allowable capital loss in accordance with section 38, applying the relevant inclusion rate. Only a fraction (1/2 for 2010) of the capital gain or loss is taxable or allowable. These qualifiers (taxable capital gain, allowable capital loss) are very important because they refer to the amount of capital gain that is included when computing income or the amount of capital loss that may be deducted in calculating income under paragraph 3(b). Pay close attention to these qualifiers so you fully understand their significance. A reference to a capital gain is quite different from a reference to a taxable capital gain. Similarly, a capital loss is different from an allowable capital loss. Adjusted cost base The additions and deductions to the cost base of non-depreciable property under section 53 are intended to prevent double taxation. Additions to the cost base are usually amounts paid that were not deductible, or amounts received that have already been taxed or were not taxable. For example, when employees acquire shares of a corporation under a stock option plan and a benefit is included in their employment income under section 7, the amount of the benefit is added to the adjusted cost base (ACB) of the shares acquired [paragraph 53(1)(j)]. Another example is the subsection 18(2) denial of interest and property taxes as a business expense on vacant land. Paragraph 53(1)(h) allows the amount denied under subsection 18(2) to be added to the ACB. Deductions are often amounts received on a tax-free basis. For example, when a taxpayer acquires a property and receives a government subsidy for the acquisition of this property, the ACB of the property will be the price paid less the amount received as a subsidy [paragraph 53(2)(k)]. Many adjustments under subsections 53(1) and (2) are very technical and will not be studied in this course; however, the majority of capital transactions require no adjustments under subsections 53(1) or (2) in determining the ACB of the disposed property. file:///F|/Courses/2010-11/CGA/TX1/06course/m06t03.htm[11/10/2010 4:41:58 PM]
Disposition costs When capital property is sold, various costs can be incurred for the purpose of selling the property and as a result of its sale. These amounts, along with the ACB of the property, are deducted from the proceeds of disposition (POD) in calculating the gain or loss [subparagraph 40(1)(a)(i)]. There is no definition of disposition costs in the ITA. If these costs are not otherwise deductible in computing income and are incurred for the disposition of the property, the items are deducted from the POD to calculate the gain or loss. Example Guylaine Doyon disposed of a non-depreciable capital property that was used to earn business income. That property was disposed of for $10,000. The selling costs totalled $500 and the original cost of the property for Guylaine was $4,000. POD $10,000 Less: Cost of property $4,000 Selling expenses 500 (4,500) Gain $5,500 As the property disposed of was a non-depreciable capital property, the amount of the gain under section 40 is equal to the capital gain under section 39. Activity 6.3-1 — Taxable capital gains In this activity, you calculate the taxable capital gain for a non-depreciable capital property. LEVEL 3 Cost of assets owned on December 31, 1971 The rules for calculating capital gains for property held on December 31, 1971 differ depending on whether or not the capital property in question is depreciable. On disposition of a depreciable capital property acquired before 1972, the median rule does not apply. Instead, under ITAR 20(1), if the capital cost of the depreciable property is less than both the FMV on valuation-day (V-day) and the POD, the POD is deemed to be the total of the capital cost of the property and the POD less FMV on V-day. The capital gain is therefore calculated using the deemed POD. LEVEL 1 Gains reserve For individuals, the prescribed Form T2017, Summary of Reserves on Dispositions of Capital Property, must be filed to claim a capital gains reserve. The (b) portion for the reserve formula may be restated as: in the year of disposition: first year after disposition: second year after disposition: third year after disposition: fourth year after disposition: 4/5 of the capital gain 3/5 of the capital gain 2/5 of the capital gain 1/5 of the capital gain nil Thus, whatever the unpaid balance of the selling price, at least one-fifth of the capital gain must be recognized in each year the reserve is claimed on a cumulative basis. file:///F|/Courses/2010-11/CGA/TX1/06course/m06t03.htm[11/10/2010 4:41:58 PM]
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Module 6: Capital gains and losses - PD Net

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