1. Tax Lesson 14 YOURLOGO Start Lecture
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YOURLOGO
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2. Capital Gains
A capital gain occurs when a capital asset is disposed of for proceeds of disposition (P of D) that exceed adjusted cost base (ACB). Capital gains are ½ taxable
A disposition is any event that results in P of D (including a sale). An abandonment of a worthless asset is also a disposition (for $0). An election is available for shares (or debt) in a bankrupt or insolvent company that are worthless. This election allows for a deemed disposition for P of D equal to $0 (which will lead to a capital loss; ½ allowable)
A taxpayer’s original intention is used to determine whether an asset is a capital property (a disposition of which will lead to a capital gain or capital loss) or inventory (a disposition of which will lead to business income or business loss)
If the taxpayer intended to sell the asset at a profit then the asset will be inventory; whereas if the taxpayer intended to use the asset as a capital asset, i.e., to use it over time to earn income, like equipment or a rental property, then the asset will be a capital property
Shares owned by a taxpayer are typically capital property; however, if the taxpayer is a stockbroker or frequently buys and sells shares and appears to act like a stockbroker then the shares owned will be considered inventory

3. Capital Gains (cont)
An election is available for Canadian securities that will allow a taxpayer to treat all dispositions of Canadian securities as capital property. This election will then apply to all future dispositions. Stockbrokers cannot use this election

4. Capital Gains Reserve
If some or all of the P of D is not received in the year of sale, then the taxpayer can claim a reserve equal to the lesser of:
(Proceeds to be received / Total proceeds) x Capital gain; and
4/5 of the capital gain in year 1; 3/5 of the capital gain in year 2; 2/5 of the capital gain in year 3 and 1/5 of the capital gain in year 4. Hence, at least 1/5 of the capital gain must be included in income each year over a 5 year period
Recall that any reserve taken in one year is added to the next year’s income (and then another reserve may be available)
If a capital gain is realized on the sale of small business corporation shares (discussed below) to a child of the taxpayer then the 2nd half of the reserve formula (above) uses 10 years as opposed to 5 years (i.e., the capital gain can potentially be spread over 10 years)