Capital Gains
What is a capital gain and why should I care?
These are questions that
taxpayers frequently ask chartered accountants.
Capital gains are taxed at
one-half of the tax rate applied to regular income, such as wages, business
income, and interest. This occurs because only one half of the capital
gain is included in income.
Using 2004 tax rates,
employment income of $100,000 would attract about $31,000 of tax, CPP, and
EI. A capital gain of $100,000 would attract tax of just under
$11,000.
What is a capital gain?
This is not a
straightforward issue as the Income Tax Act does not provide precise
guidance on distinguishing capital gains from regular income. There
have been many disputes on this topic with Canada Revenue Agency, including
numerous court cases. The following are some guidelines that can be
followed:
-
Has some property
been sold? For example, did you sell a rental property? Payment for a
service, employment, rent or interest is not considered to be a capital
transaction.
-
The period of
ownership. Normally, a property held for only a short time will be
considered to have been purchased for reselling. An example of this
would be speculating in real estate.
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The frequency of
similar transactions. For example, if you bought and sold stocks several
times a year, the gain on the shares would be considered to be capital.
If you bought or sold stocks hundreds of times in the year, and this was
your major source of earnings, then the increase in the value of the
shares would be considered income.
-
The reason and the
nature of the sale. If you are selling because of unanticipated need for
cash or because of expropriation, then the sale might be considered to be
capital in nature.
-
Is there an
improvement or development work on the property? If you are in the
business of fixing up houses and then selling them, then the money you
make on the sale would probably be considered to be income and not
capital.
-
The relationship of
the transaction to your normal course of business. If you sell the
building that houses your repair shop, then this sale would be
considered capital.
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Conclusion:
The combination of the answers to these questions will guide you in determining whether or not a sale is a capital gain or income. You should consider consulting a chartered accountant if you are unclear about how to treat a sale for tax purposes.
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B.A., Articling
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Senior Accounting
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Accounting
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Accounting
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B.A.
Accounting
Technician |
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