The Taxation of Capital Gains

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The Taxation of Capital Gains
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Capital Gains
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ITA Section 3

• Basic Rules
• s.3 (a) determine income from office,
  employment, business and property
• s.3(b) determine total taxable capital gains
  EXCEED allowable capital losses

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Capital Gains
Purchase a building in 1998 for 10,000. Sell in
2002 for 30,000. Proceeds of Disposition
30,000 Adjusted Cost Base -10,000 Capital
Gain 20,000 Taxable Capital Gain 50 10,000
Sell the building in 2002 for 5,000 Proceeds of
Disposition 5,000 Adjusted Cost
Base -10,000 Capital Loss 5,000 Allowable
Capital Loss 50 2,500
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Taxation of Capital Gains

• History and Policy
• Capital Gains and Inflation

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Ordinary Income versus Capital Gains

• Distinction once relied heavily on common-law
• Now, s.248
• A business includes an Adventure in the Nature
  of Trade
• Different Intentions Toward Property
• Investment Intention
• Trading Intention
• Personal Use

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Ordinary Income or Capital Gains?

• Joe buys a piece of land in downtown Winnipeg.
  Several weeks later, Joe sells that property for
  a profit buys another.
• Sue sells the family home after 20 years of
  occupation for much more than the original price.

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Ordinary Income or Capital Gains

• Some criteria used by the Courts
• Nature of the Property
• Length of Ownership/Frequency
• Conduct of TP in relation to property
• Intention of TP

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Ordinary Income or Capital Gains

• Californian Copper Syndicate, 1904
• Regal Heights, 1960
• Irrigation Industries, 1962
• Taylor, 1956

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Principle Elements of the System

• Taxed on realization basis
• Requires Disposition of Property definition,
  s.248(1)
• Dispositions
• Deemed Dispositions
• Death, s.70(5)
• Gifts, s.69(1)(b)
• Change of residency, s.128.1
• Change of use, s.45

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Principle Elements of the System

• Adjusted cost base
• S.40(1) provides
• Capital Gains Proceeds of Disp. A.C.B.

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Essential of the Capital Gains

• Rollovers
• Spousal rollover, s.73(1)
• Spousal rollover, s.70(6) (death)
• W. transfers house to H. W.s ACB is 10,000,
  FMV at transfer is 20,000.
• H. assumes W.s property at ACB of 10,000

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Special Rules for Certain Property

• Personal use property
• Listed personal property (LPP)
• Principal residence
• No losses on personal use property s.40(2(g)(iii)

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De minimus Rule, s. 46(1)
Sell a rare coin, original purchase price 700,
for 1,300? For 600? Capital gains or losses?
Proceeds of Disposition 1,300 Adjusted Cost
Base 700 Capital Gain 600
1,000 300
Proceeds of Disposition 600 Adjusted Cost
Base 700 Capital Gain (Loss) 100
1,000 1,000 0
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Principle Residence Exemption
Joe buys a house in 1999 for 70,000, lives in it
and sells it in 2002 for 110,00. Capital
Gain P.O.D. A.C.B 40,000 110,000
- 70,000 Exempt??
Gain Gain on Disposition (G.O.D. (1 Yrs. of
Design) Yrs. Owned 0 40,000 (40,000
(1 4)) 4
If negative, s.257 deems this amount to be nil