CHAPTER EIGHT

1
CHAPTER EIGHT

• Gains and Losses on the Disposition of Capital
  Property Capital Gains
• I. Real Estate-special situations
• II. Multiple/Change in use
• III. Leaving/Entering Canada
• IV. Non-Arms Length
• V. Gain on Settlement of Debt
• VI. Death of a Taxpayer
• VII. Special Situations
• VIII. Impact on Investment and Management
  Decisions

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Exclusions Ch 8

• Foreign Exchange Gains/Losses
• Options
• Convertible Properties/Cap Gains Deferral
• Certain shares deemed to be capital property
• Supplemental Notes

3
Real Estate Used to Carry on a Business

• If the replacement is voluntary and the real
  estate is replaced by the end of the taxation
  year following the year of disposition, the gain
  will reduce the ACB of the replacement property.
  This exception does not apply to real estate used
  to earn property income from rentals.
• If the replacement is involuntary, such as
  expropriation, and the real estate is replaced by
  the end of the second taxation year following the
  year of disposition, the gain will reduce the ACB
  of the replacement property.

4
Voluntary/Involuntary Disposition

• In the case of Recapture if replaced the
  recapture will be used to reduce the UCC instead
  of coming into income
• In order to fully defer the gain/recapture you
  must spend at least the same amount as you
  received on the sale of the first property
• Neither of the exceptions apply to personal use
  real estate.

5
Proceeds on Disposition of Building Land

• Effectively eliminates the terminal loss on the
  sale of a building with land by using the
  terminal loss to reduce the gain on the building.
• IE Sale of Land and building for 200,000
• UCC of Building 75,000 or cost 90,000
• FMV Building 50,000
• Land- ACB 100,000 FMV 150,000

6
Proceeds on sale of Land/Buildings

• Without ITA 13(21.1) Land Buildings
• Proceeds 150,000 50,000
• ACB/UCC 100,000 75,000
• Gain/Terminal loss 50,000 (25,000)
• TCG/Terminal loss 25,000 (25,000)
• Net effect on Income NIL

7
Proceeds on sale of Land/Buildings

• With ITA 13(21.1) Land Building
• Deemed proceeds 125,000 75,000
• ACB/UCC 100,000 75,000
• Gain/Terminal Loss 25,000 NIL
• TCG/Terminal Loss 12,500 NIL
• Net effect on Income 12,500
• Effectively makes terminal loss ½ deductible

8
Property with more than 1 use

• Change in use- deemed disposition at FMV
• Dual use property there must be a reasonable
  allocation of cost/Proceeds
• Change in use does not apply in changing from one
  income producing use to another ie business to
  rental
• For personal use property capital gain may be
  deferred with an election by taxpayer
• Works only on a change from personal to another
  use not vice versa

9
Change in use and principal residence

• On change in use a resident can designate the
  property as his principle residence for up to 4
  years for purposes of the change in use rules
  only. Therefore change in use has not occurred.
• Does not affect the claim for the principle
  residence exemption calculation.
• Cannot take CCA during the period

10
Transfer of ownership to spouse

• On transfer of principal residence from one
  spouse to another occurs.(ie Spouse A to B)
• Effectively with Subsection 40(4) the years that
  Spouse A could designate the property as a
  Principal residence are transferred to Spouse B.
• Spouse A cannot also use the same years.

11
Leaving and entering Canada

• On ceasing to be a resident all capital property
  deemed to be sold at FMV
• Exempted Real property
• Business property in permanent establishment
• Canadian property that is not liquid ie stock
  options
• Will be responsible for taxes on exempt items as
  a non-resident
• Right to receive certain payments ie RRSP also
  exempt

12
Entering Canada

• All assets deemed to be acquired at FMV at the
  time of entry.
• Exception
• Taxable Canadian Property

13
Non-Arms Length Defined

• When the values placed on financial transactions
  are not determined by supply and demand, the
  parties are considered not to be dealing at arms
  length.
• The Act deems parties not to be dealing with each
  other at arms length if they are related.
• Non-arms length transactions can occur between
• An individual and another individual
• An individual and a corporation
• A corporation and another corporation

14
Non Arms Length Individuals

• Transactions between individuals
• For tax purposes, individuals are related to each
  other if they are direct-line descendents
  (grandparents, parents, children, grandchildren,
  etc.) or if they are brothers, sisters, spouses,
  or in-laws.
• Transactions between individuals and
  corporations
• An individual is related to a corporation is
  he/she controls the corporation, or is a member
  of a related group that controls the corporation,
  or is related to an individual who controls the
  corporation.
• Transactions between corporations
• Two corporations are related if one corporation
  controls the other corporation, or if both
  corporations are controlled by the same person,
  or if one corporation is controlled by one person
  who is related to the person who controls the
  other corporation.

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Related not by blood but by Fact

• Even when parties are not related, it is a
  question of fact whether they are dealing at
  arms length for a particular transaction.
• Where there is sufficient cause, CCRA can deem
  two unrelated parties not to be dealing at arms
  length.

16
Property Transferred to a Spouse or Child

• Property transferred to a child, whether by gift
  or sale, is deemed for tax purposes to have been
  sold at FMV in accordance with the rules
  described previously.
• Property sold or gifted to a spouse is deemed to
  have been sold and acquired at its cost amount
  (capital property is deemed to have been sold at
  its ACB and depreciable property at its UCC).
• Alternatively, a taxpayer can choose to recognize
  a gain on a spousal transfer.

17
Consideration for Gift/Non Arms Length

• Non Arms Length Seller
  Purchaser
• ProceedsgtFMV ProceedsAct Cost FMV
• Proclt FMV ProceedsFMV Costamt pd
• Gift ProceedsFMV
  CostFMV

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Income Attribution-Spouse

• Transfers or loans
• If transferred with payment at FMV no issue
• If interest is charged on loan at prescribed rate
  no issue
• If low or no interest then any income or
  loss(including capital gains) from the property
  is attributed back to original spouse
• Interest must be paid in year or within 30 days
  of Year end.

19
Attribution- Minors

• Younger than 18 years of age
• Property income subject to attribution
• Capital gains is not attributed back

20
Gain on Settlement of Debt

• An individual or a corporation may be in a
  position to settle an outstanding debt for less
  than the amount of principal owing. In effect,
  the debtor achieves a gain from the transaction.
• When this type of gain occurs, it is not directly
  included in taxable income.

21
Gains on settlement of Debt

• Instead, it is first applied to reduce any losses
  that have been carried over from other years, in
  the following order
• Non-capital losses
• Farm losses
• Restricted farm losses
• Allowable business investment losses
• Net capital losses

22
Gain on settlement of debt (cont)

• When a taxpayer does not have any of these losses
  available, the gain is applied to reduce the
  capital cost or the ACB of the following types of
  assets, in any order
• Depreciable property
• Capital property (non-depreciable)
• Cumulative eligible capital
• Certain other properties
• If all of the forgiven debt is not consumed by
  applying it to the above items, ¾ of the
  remaining amount will be included in the
  taxpayers income in that year.

23
Death of a Taxpayer

• The tax implications triggered by the death of an
  individual taxpayer are as follows
• Income from all sources is accrued up to the date
  of death.
• All capital property that was owned by the
  deceased is deemed to have been sold at fair
  market value.
• Representatives of the deceased (executors) are
  given control of the assets. After all
  liabilities have been satisfied, the assets are
  either sold or transferred to beneficiaries in
  accordance with the terms of a will.

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Special Situations

• 1994 Capital Gains Exemption Election
• Deemed disposition if election filed to take
  advantage of 100,000 exemption
• Pre 1972 CG system
• 1971 Valuation day- Median Rule or V-Day Value
• Median or Middle of
• Actual Cost
• V D Value
• Proceeds of Disposition

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VI. Impact on Investment and Management Decisions

• The influence of the tax treatment of capital
  properties on investment and management decisions
  centres on the fact that preferential treatment
  is given to capital gains, regarding the amount
  taxable and the timing of income recognition
  whereas restricted treatment is given to the
  utilization of capital losses.