ch8so - Chapter 8 Capital Gains Questions 8-1 (a) The...

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Chapter 8 Capital Gains Questions 8-1 (a) The taxation of only a portion of capital gains and the lifetime capital  gains exemption are both intended to encourage capital investment  and risk taking by taxpayers. Such tax advantages increase the after- tax gains realized, relative to a similar pre-tax amount if it were to be  earned as income. Without such incentives, vital investment dollars  would likely be unavailable to the country’s industries and businesses. (b) The taxation of a portion of capital gains was an effort to move the  taxation  system towards greater  equality  and  neutrality.  Allowing  capital gains to be realized tax free provided an unfair advantage to  wealthier taxpayers, because, it is usually the wealthier taxpayers who  are most able to make capital investments. This meant, for instance,  that a taxpayer who earned $20,000 in capital gains paid no tax, while  another taxpayer who received $20,000 in wages was taxed. This,  clearly, was a tremendous imbalance in the taxation system. The  taxation of only half of any capital gains provided greater equality,  while still providing an incentive to invest in capital properties. (c) The intent behind not allowing capital losses to offset other sources of  income is that gains are taxed on a preferential basis and so there  should be a “matching” of the treatment of losses with the preference.  89
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90 TAXATION   IN   CANADA Also,   allowing   losses   against   other   sources   of   income   would  encourage   risk   taking as losses would be subsidized by the tax system. Perhaps most  importantly, the government would also lose tax revenues.
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CAPITAL   GAINS 91 (d) This is intended to encourage investment in small business by having  the tax system absorb some of the loss where the investment does not  pan out. (e) Disallowing the deduction of personal-use property losses prevents an  inequality   from   arising   in   the   taxation   system.   A   personal-use  property (PUP), by definition, is a property for which the primary use  is to provide enjoyment or personal satisfaction for the owner. Any  losses arising on the disposition of such properties is assumed to  represent the consumption of that investment for personal enjoyment  and, thus, any capital loss is disallowed. To do otherwise would create  a large inequality in the taxation system because a taxpayer who  invested in a PUP and suffered a loss would be receiving a subsidy for  his or her personal consumption of that property. (f)
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ch8so - Chapter 8 Capital Gains Questions 8-1 (a) The...

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