8%20-%20Capital%20Gains%20and%20Losses

8%20-%20Capital%20Gains%20and%20Losses - Chapter 8 Capital...

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Chapter 8 – Capital Gains and Losses
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Capital Gains Capital gains arise on the disposition of assets that were formerly producing either business or property income These are usually incidental to the business or property income – they don’t happen on a regular or recurring basis. Capital gains were not taxed at all prior to 1972, at which point the decision was to make 50% of the gain taxable, and to allow deduction of 50% of capital losses against any capital gains. Certain capital gains, up to $375,000 (1/2 x $750,000) are not taxable, including: – Gains on sale of shares of a qualified small business corporation – Gains on the disposition of a qualified farm or fishing property
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Terminology 100% of the gain or loss amount Capital Gain Capital Loss 50% (or 66.67% or 75%) (Known as the inclusion rate) Taxable Capital Gain Allowable Capital Loss
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Inclusion Rate • The rate used to determine the amount of capital gain that is taxable – 1972-1987, and since Oct 18, 2000 50% – 1988-1989 and Feb 28-Oct 17, 2000 66.67% – 1990 to Feb 27, 2000 75% • Because capital losses can be carried forward indefinitely, it may be necessary to convert a loss from the period from 1988 to Oct 27, 2000 from the inclusion rate used to the current 50% rate. • This issue will be dealt with when we discuss losses in Chapter 11.
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Capital Assets • Capital gains/losses occur on the sale of capital assets. – Capital assets are assets which are used to earn income from business or property, (interest, dividends, royalties or rents) – Often an issue, because taxpayers will prefer to argue income is a capital gain due to the favourable taxation (50% of the gain is taxable instead of 100%). – Taxpayers will prefer not to have capital losses because the deduction of capital losses is limited to capital gains. – Depends on the frequency of the transaction, taxpayer conduct, nature of asset, relationship of asset to taxpayer business.
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Defining Capital Gains • Because of the favourable tax treatment for capital gains, many taxpayers will argue that income from selling something is a capital gain rather than business or property income • This is an issue that is especially strong when it comes to sales of income producing securities – Hard to determine if the taxpayer is holding the securities to generate dividend income or an eventual capital gain on sale. – ITA 39(4) allows all taxpayers (with a few exceptions) to elect to have all Canadian securities they own deemed to be capital property, so all gains and losses are capital gains and losses.
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Disposition • A disposition is a transaction that entitles a taxpayer to proceeds of disposition. – Includes: sales of property, redemptions,
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8%20-%20Capital%20Gains%20and%20Losses - Chapter 8 Capital...

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