Capital Gains and Capital Losses
Capital Gains and Capital Losses
- Capital gains and losses occur when a taxpayer dispose capital assets
- Often at times, the distinction between capital gains and business income is difficult to discern – please see our “business income vs. capital gains” notes for more info
What are capital assets?
Capital Assets = Assets held in the business to help earn income rather than for quick resale
Types of Capital Assets:
- Depreciable Capital Assets:
- Assets that you take CCA on
- Examples: Building, Equipment, Furniture, etc..
- You can have capital gains on depreciable capital assets
- capital losses are NOT allowed on depreciable assets (since you already get CCA)
- Eligible Capital Properties are not considered depreciable capital assets; and therefore 50% of the gain on these assets are considered business income
- Non-Depreciable Capital Assets
- Examples: Land, Marketable Securities (i.e. Shares)
- Non-depreciable capital assets can have capital gains and losses
Calculating Capital Gain
Capital Gains (Losses) = Proceeds of Disposition – Adjusted Cost Base – Selling Costs
Taxable Capital Gain = 50% * Capital Gain [this is the amount reported in income]
Allowable Capital Loss = 50% * Capital Loss
What are Proceeds of Disposition?
- Selling Price
- Proceeds from insurance policies for stolen/damaged properties
What is Adjusted Cost Base (ACB)?
- ACB = The original purchase cost + delivery and set-up charges + non-refundable sales taxes + legal fees + any other incremental costs to get asset ready for intended use
Other adjustments to ACB:
- Reduce government grants from ACB of the related assets (i.e. gov’t may give grant to help you buy an equipment)
- Superficial Losses – superficial losses are added to the ACB (see Affiliated Persons and Stop Loss Rules notes)
- Interest and property taxes in excess of rental income earned from vacant land are also added to the ACB of the Vacant Land
Selling Costs = legal fees, commission
Capital Losses: Special Rule
- Capital Losses for the year can only be deducted against Capital Gains
- Any unused allowable capital losses in the current year are first carried back 3 years; if any allowable capital losses still remain, they can be carried forward indefinitely.
- Example: in 2012 the following happened,
- Business Income = 1,000
- Capital Gains = 500
- Capital Losses = 800
- You can only claim capital losses to the extent of capital gains; therefore you can claim $500 capital losses in 2012
- You would carry back the unused allowable capital losses of $300*50% = $150 three years (2011, 2010, 2009); any amounts still remaining can be carried fwd. indefinitely
- Unused allowable capital loss = Allowable Capital Loss – Taxable Capital Gain = Net-Capital Losses; for both individuals and corporations it can be carried back or forward under Division C.
Capital Gains Reserve
- The capital gains reported are further reduced by the capital gain reserves; please see our notes “reserves for tax purposes”