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:

  1. 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
  1. 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

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