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Chapter 7 & 8 - Capital Gains.docx

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Wilfrid Laurier University
Tao Zeng

Chapter 7 & 8 – Capital Gains Determining a Capital Gain or Loss: Proceeds on Disposition (POD) $XXX Less: Adjusted Cost Base (ACB) (XXX) Less: Disposition Expenses (XXX) Net Amount $XXX Less: Reserve (XXX) Capital Gain/Loss $XXX Taxable Capital Gain (TCG) = ½ X Capital Gain/Loss Allowable Capital Loss (ACL) is deductible only from Taxable Capital Gains, cannot be deducted from any other source of income. Deferred Proceeds [40(1)(a)] The maximum reserve for any year is the lessor of: - (Deferred Proceeds / Total Proceeds) X Net Amount OR - (1/5 of Net Amount) X (4 - # of preceding years after disposition) Problem 2 (Chapter 8) – ANU to provide answer from notes Proceeds on Disposition (POD) $ Less: Adjusted Cost Base (ACB) () Less: Disposition Expenses () Net Amount $ Less: Reserve (XXX) Capital Gain/Loss $XXX Personal Use Property (PUP) [Sec 46, 54] All gains on personal use property are taxable while losses are non-deductible (cannot reduce income). These restrictions are applied to each item of personal property. - Minimum Proceeds on Disposition = $1,000 - Minimum ACB = $1,000 These two conditions must be satisfied in order for restriction to occur. Listed Personal Property (LPP) [41(2), 54] Personal use property (PUP) does have some investment value if: - A print, etching, drawing, painting, or sculpture or other similar works of art - Jewellery - Rare folio, rare manuscript or rare book - A stamp - A coin Losses that are recognized are only deductible against gains on LPP. These losses cannot be used to reduce any other source of income or on any other personal property. Unused losses can be carried back 3 years and forward for 7 years. The same conditions as PUP apply: - Minimum Proceeds on Disposition = $1,000 - Minimum ACB = $1,000 Allowable Business Investment Loss (ABIL): Allowable Business Investment Losses are effectively allowable capital losses, resulting from the disposition of shares or debt of Small Business Corporations (SBC). These losses are deductible against any type of income and not restricted to capital gains. They are identified and segregated from the net taxable capital gain/loss computation for the year, and dealt with separately. This is effectively an additional tax incentive to motivate investors to invest in Canadian small businesses. Up to $50,000 in deductions over entire life. Principle Residence [Sec 54] A principle residence is one that is owned and ordinarily inhabited for personal use. There is a limit of one principal residence per family unit that is designated at the sale. Claim exemption against capital gains. Principle Residence Exemption [40(2)(b)] Exemption = ( ) X Gain Goal is to maximize exemption = ( ) Result = no tax being paid The 1+ covers the year both houses are owned as a result of purchasing and selling a home Problem 1(Chapter 7) Home # years owned (A) Gain (Selling Price – Cost) (B) Gain per year (A/B) = (C) Toronto 8 $80,000 $10,000 Quebec 6 $48,000 $8,000 Florida 3 $36,000 $12,000 *include both year purchased and year sold when calculating the number of years owned *Start with the highest gain per year as designation Florida Condo has the highest gain per year: Exemption = [(1 + 2) / 3] X $36,000 = $36,000 Capital Gain = Gain – Exemption = $36,000 - $36,000 = $0; *no income tax paid on this property Explanation: We will allocate this property for year 2011 and 2012 as principal residence since the property was purchased in 2010. Toronto Home has the next highest gain per year: Exemption = [(1+5)] / 8 X $80,000 = $60,000 *2005-2009 = 5 years Capital Gain = Gain – Exemption = $80,000 - $60,000 = $20,000 taxable Explanation: since the home was purchased in 2005, we can make this the principal residence up to the year 2009. 2011-2012 the principal home was the Florida condo due to the higher gain per year. Quebec home has the next highest gain per year: Exemption = [(1+1)] / 6 X $48,000 = $16,000 Capital Gain = Gain – Exemption = $48,000 - $16,000 = $32,000 taxable Taxable Capital Gains (TCG) = $20,000 + $32,000 = $52,000 X ½ = $26,000 Since the Quebec home needs to be principal designation for at least one year, and it was purchased between the Toronto home and the Florida home, we will make this designation for 2010. The reason is that the Florida home has the highest gain, and therefore is principal residence to maximize tax deduction from the time it was purchased which was in 2010. We know the Toronto home also has a higher gain per year and was the first home purchased. We also want to maximize this tax deduction but with the knowledge that the Quebec home needs to be principal for at least one year. We would set Toronto principal for as long as possible to max deduction, then set Quebec home for one year and then set the highest gain per year home from the time of that purchase on. Identical Properties [Sec 47] The Adjusted Cost Base (ACB) of identical property (ex. Shares) acquired is the floating weighted average cost of all the identical properties acquired. ACB = Stock Dividends Stock dividends before May 23, 1985 have an ACB of $0. Stock dividends after May 22, 1985 have an ACB equal to the Paid-Up Capital (PUP) Note: Paid up capital is recorded by the company and the responsibility of the company to notify shareholders of this amount. Superficial Losses (Denied) [53(1)(f)] A superficial loss is an attempt to defer the recognition of capital losses for tax purposes under a scheme known as “tax-loss selling”. This is achieved by denying some or all of a loss realized on a disposition and adding this same amount to the ACB of the remaining identical assets held. - There is no intention of disposing the asset - Requirement: the asset is disposed of and then reacquired within 30 days - The taxpayer must own some of that asset at the end of that 30 day period in order for it to be considered a superficial loss The denied losses are added back to the ACB of the reacquired asset. Example: Taxpayer sold 500 shares in corp. X for $8,000 on Dec 31, 2010. They had an ACB of $10,000. On Jan 5, 2011, he reacquires 500 shares of corp. X for $7,500. Shares sold on Dec 31, 2010: Proceeds on Disposal (POD) $8,000 Adjusted Cost Base (ACB) $10,000 Capital Loss $(2,000) Superficial loss denied $0 ACB of shares purchased on Jan 5, 2011: Original Adjusted Cost Base (ACB) $7,500 *purchase price of shares Denied loss $2,000 *reacquired within 30 days New Adjusted Cost Base $9,500 Problem #3: Note: ACB = Total Cost/Total number of shares Type Date # Shares ACB Total Cost Calc/comment Purch. Nov 8/05 1,000 $5,000 $5.00/sh. Purch. Apr 15/06 2,000 $7,000 $3.50/sh. 3,000 $4.00 $12,000 ACB=(5k+7k)/(1k+2k) = 12,000/3,000 = $4/sh Sale June 6/07 (500) $(2,000) 500 X $4 (#shares X ACB) Purch. July 2/07 2,000 $8,000 2,000 X $4 Superficial loss $675 (500 X $4) – (500 X2.75) – 50 = $675 added 4,500 $18,675 Div. Apr 30/08 450 $225 4,500X10% = 450 // 450 X $0.50 = $225 4,950 $18,900 Split Jun 20/09 4,950 No cost change 9,900 $18,900 4,950 X 2 Purch. Nov 8/10 2,000 $12,000 2000 X $6 11,900 $30,900 Div. Jan 12/11 1,190 $1,190 11,900 X $1 13,090 $2.45 $32,090 ACB = $32,090/13,090 = $2.45 Sale Nov 5/12 (10,000) POD = 10,000 X 7.50 = $75,000 ACB = 10,000 X 2.45 = ($24,500) Commission = ($650) CG = $49,850 X ½ = TCG = $24,925 Opening Balances 3,090 $2.45 $7,570 Total cost = #shares X ACB Death of a Taxpayer [Sec 70, 73] - All income should be reported (interest, rent, and salary) that are received or accrued to the date of death - Income from “rights and things” should be reported (matured but un-cashed bond coupons, declared but unpaid dividends, unpaid salary) The deceased taxpayer is deemed to dispose of his/her property at FMV and the beneficiary is deemed to acquire the property at FMV. (ACB of property for beneficiary is the FMV of property acquired) If the beneficiary is the spouse; the property can be elected to be disposed at cost by the deceased taxpayer, and acquired by the spouse at cost. This is called a Roll Over – property is transferred at original cost. There is no capital gain/loss for deceased tax payer. The ACB of property
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