With a huge influx of Indian residents into Canada and its open arms to encourage more qualified ones to merge there from India or other countries, the most frequent questions pertain to capital gains or losses related to Canadian taxation. It is time to learn it from Canada Revenue Agency, the taxation arm of the Canadian government.

Relevant reference is given from the web site of above agency. It is a 48 pages booklet with clear directions towards understanding the concepts thoroughly.

Let us look at the basics.

What is a capital gain?

You have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

The term ‘’outlays and expenses’’ is defined as under.

Outlays and expenses – These are amounts that you incurred to sell a capital property. You can deduct outlays and expenses from your ‘’proceeds of disposition’’ when calculating your capital gain or loss.

What are proceeds of disposition?

Proceeds of disposition – This usually is the amount you received or will receive for your property. In most cases, it refers to the sale price of the property. This could also include compensation you received for property that has been destroyed, expropriated, or stolen-mostly from insurance or from government agencies, if one can presume.

Naturally, one does raise the question of capital loss.

Capital loss – You have a capital loss when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

What is the adjusted cost base?

Adjusted cost base (ACB) – This is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees. The cost of a capital property is its actual or deemed cost, depending on the type of property and how you acquired it. It also includes capital expenditures, such as the cost of additions and improvements to the property. You cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

If you have a capital loss in 2021, you can use it to reduce any capital gains you had in the year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to taxable capital gains of the 3 preceding years and to taxable capital gains of any future years.

You will need information from your records or supporting documents to calculate your capital gains or capital losses for the year.

Informative website from Canadian taxation is as under:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25400-capital-gains-deduction/what-deduction-limit.html

All our discussions have the base in above and other websites run by Canadian tax agency.

Who is eligible to get capital gains?

Usually, you have a capital gain or loss when you sell or are considered to have sold capital property. The following are examples of cases where you are considered to have sold capital property:

  • You exchange one property for another
  • You give property (other than cash) as a gift
  • Shares or other securities in your name are converted
  • You settle or cancel a debt owed to you
  • You transfer certain property to a trust
  • Your property is expropriated
  • Your property is stolen
  • Your property is destroyed
  • An option that you hold to buy or sell property expires
  • A corporation redeems or cancels shares or other securities that you hold (you will usually be considered to have received a dividend, the amount of which will be shown on a T5 slip)
  • You change all or part of the property’s use
  • You leave Canada
  • The owner of the capital property passes away

What happens if you have a capital gain?

If you have a capital gain, you may be able to do one of the following:

  • defer part of the capital gain by claiming a reserve.
  • reduce or offset all or a part of the gain by claiming a capital gain deduction.

How to claim capital gains deduction and in which cases can I claim it?

You may be able to claim the capital gains deduction on taxable capital gains you have in 2021 from:

  • dispositions of qualified small business corporation shares
  • dispositions of qualified farm or fishing property
  • a reserve brought into income in 2021, from either of the above.

What is a reserve?

I do sell a property, say $40,000 but I receive only $10,000, then this portion can also be considered as capital gain.

Usually, a reserve allows you to report a portion of the capital gain in the year you receive the proceeds of disposition.

Actual case study for better understanding.

In 2021, Mario sold 400 shares of XYZ Public Corporation of Canada for $6,500. He received the full proceeds at the time of the sale and paid a commission of $60. The ACB of the shares is $4,000. Mario calculates his capital gain as follows:

A -Proceeds of disposition $6500
B – Adjusted cost base $4000
C – Outlays and expenses on disposition $ 60
B+C $4060
Capital gains $6500-$4060= $2440

Can the tax payer use the full $2440 as capital gain?

The stipulations from the instructions of Canada Revenue Agency are very clear.

Because only 1/2 of the capital gain is taxable, Mario completes Schedule 3 and reports $1,220 as his taxable capital gain on line 12700 of his income tax and benefit return.

When you sell, or are considered to have sold, a capital property for less than its ACB plus the outlays and expenses incurred to sell the property, you have a capital loss. You can apply 1/2 of your capital losses against any taxable capital gains in the year.

The time to understand Schedule 3 to calculate capital gains/losses under various categories is now.

Lifetime capital gains exemption limit – For dispositions in 2021 of qualified small business corporation shares, the lifetime capital gains exemption (LCGE) limit has increased to $892,218.

T1-2021 which leads a taxpayer towards calculation of capital gains/loss is dealt now.

Form T 1 is reproduced below:

https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/5000-s3/5000-s3-21e.pdf

Let us learn the nuances of this form.

Schedule 3 has five numbered columns and is divided into several sections for reporting the disposition of different types of properties. Report each disposition in the appropriate section and make sure you provide the information requested in all columns. Complete the rest of the schedule to determine your taxable capital gain or your net capital loss. If you have a taxable capital gain, transfer the amount to line 12700 of your income tax and benefit return. If you have a net capital loss, see Chapter 5 for information on how you can apply the loss.

Let us analyze line by line from T1.

General instructions at the beginning of the form.

“Complete this schedule to report your taxable capital gains on line 12700 of your return. If you need more space, attach a separate sheet. Attach a copy of this schedule to your paper return. For more information about capital gains or losses, including business investment losses, see Guide T4037, Capital Gains. If you realized a gain on a disposition, you may be able to claim a capital gains deduction on line 25400 of your return. If you have capital gains or losses on your T5, T5013, T4PS, and T3 information slips, report them on line 17400 or line 17600 of this schedule.”

Canadian taxation – Capital gains or losses

The form consists of 5 numbered columns as under:

Property type (1) Year of acquisition (2) Proceeds of disposition (3) Adjusted cost base (4) Outlays and expenses (from dispositions) (5) Gain (or loss) (column 2 minus columns 3 and 4)

What are the property types? (Every one of the property types would invariably cover those 5 columns indicated above)

1. Qualified small business corporation shares Number Name of corp. and class of shares Gain (or loss)

2. Qualified farm or fishing property Address or legal description Prov./Terr. Gain (or loss)

3. Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares.

Number Name of corp. and class of shares

Gain (or loss)

4. Real estate, depreciable property, and other properties (see the next page for principal residence)

Address or legal description Prov./Terr.

Gain (or loss)

5. Bonds, debentures, promissory notes, and other similar properties Face value Maturity date Name of issue

Gain (or loss)

6. Other mortgage foreclosures and conditional sales repossessions Address or legal description Prov/Terr.

Gain (or loss)

7. Personal-use property (see the next page for principal residence) (Provide full description)

Gain (or loss)

8. Listed personal property (LPP) (LPP losses can only be applied against LPP gains)

(Provide full description)

Gain (or loss)

Add lines 1 to 9. Total of gains (or losses) of qualified properties and other properties =…….

The form ends with the following sentence (line 22).

Taxable capital gains (or net capital loss) in 2021, 19900=

The following web site explains in details every one of the above noted property type and how to deal with capital gains/losses.

What about foreign currencies which swing with time and if held by a tax-payer?

Foreign exchange gains or losses from capital transactions of foreign currencies (that is money) are considered to be capital gains or losses. However, you only have to report the amount of your net gain or loss for the year that is more than $200. If the net amount is $200 or less, there is no capital gain or loss and you do not have to report it on your income tax and benefit return.

What about capital gains in case of corporation tax?

Form given below narrates the steps.

https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t2sch6/t2sch6-21e.pdf

Understanding the form leads as under.

Summary of Dispositions of Capital Property (2011 and later tax years)

Corporation’s name business number Tax year end.

Beginning instructions are very clear and apt.

“Use this schedule if your corporation disposed of (actual or deemed) capital property or claimed an allowable business investment loss (ABIL), or both, in the tax year. • All legislative references are to the federal Income Tax Act. • Also use this schedule to make a designation under paragraph 111(4)(e) if control of the corporation has been acquired by a person or a group of persons. • For more information, see the section called “Schedule 6, Summary of Dispositions of Capital Property” in the T2 Corporation Income Tax Guide. • If you need more space, attach additional schedules.”

  • Part 1 – Shares
  • Part 2 – Real estate (Do not include losses on depreciable property)
  • Part 3 – Bonds
  • Part 4 – Other properties (Do not include losses on depreciable property
  • Part 5 – Personal-use property (Do not include listed personal property)
  • Part 6 – Listed personal property
  • Part 7 – Property qualifying for and resulting in an allowable business investment loss
  • Part 8 – Capital gains or losses
  • Part 9 – Taxable capital gains and total capital loss.

The common thread adorning the above heads reads as under:

1. Description of property.

2. Date of acquisition YYYYMMDD

3. Proceeds of disposition

4. Adjusted cost base

5. Outlays and expenses from disposition

6. Gain only (column 3 minus columns 4 and 5; if negative, enter “0”)

In case of shares, details of number of shares, name of the corporation, class of shares along with other above narrated details set the gain (or loss).

For bonds, we have:

1 Face value of bonds

2 Maturity date YYYYMMDD

3 Name of bond issuer

4 Date of acquisition YYYYMMDD

5 Proceeds of disposition

6 Adjusted cost base

7 Outlays and expenses from disposition

8 Gain (or loss) (column 5 minus columns 6 and 7)

What about partnership forms?

Guide for the partnership information return is available under T5013 forms.

Conclusion

Canada, the pinnacle of any professional young man/woman entices them to emigrate legally, earn a decent income, and pay the taxes due to the citizen or permanent resident as the case may be. But the caveat is the penalty, fine or interest for non-adherence to submission of tax forms reach a large scale of punishment. This article follows its core policy of informing its readers the finer aspects of the Western society from a legal/taxation angle with the resultant fine for failure to live up to the expectation as a decent citizen.

Yes, reasonably I have covered capital gain/loss and how to calculate, and file the forms.

A C.P.A. will invariably use a good software, track the records, and help any taxpayer at point of need. Yes, please avoid playing with your tax forms but use the best services of a C.P.A., the most qualified professional to handle this work.

Yes, it is a request from a fellow C.P.A., the undersigned writer of this article.

Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in `this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

Author Bio

Qualification: Post Graduate
Company: subramanian natarajan cpa firm
Location: NEW DELHI, Delhi, India
Member Since: 09 May 2017 | Total Posts: 207
A banker with 27 years of experience, a CPA from USA with specialization in US taxation, individual, partnership, S corporation or LLC taxation etc View Full Profile

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