The Canada Revenue Agency views gains incurred from the disposition of Canadian and prescribed securities differently. As these two securities are similar, it can sometimes be difficult to figure out the difference between the two. Read about how to identify both securities, as well as how to report your gains on your income tax return.
Defining Canadian Securities
A Canadian security is a share of capital stock of a corporation that is both based and doing most of its business in Canada.
However, a Canadian security is also a unit of a mutual fund trust or a bond, debenture, bill, note, mortgage, or similar obligation issued by a person who is a resident of Canada.
If a security is prescribed, it cannot be considered a Canadian security.
Defining Prescribed Securities
A prescribed security is a share of a corporation that is not public. Most of the value in these shares comes from real estate, resource properties, or both.
Additionally, prescribed securities can include bonds, debentures, bills, notes, mortgages, or similar corporate obligations that are not from public corporations. However, prescribed securities must be obtained from corporations or individuals that you do not deal with at arm’s length.
Being at arm’s length means that both parties act independently of one another, with neither party holding any power over the other. This means that to obtain prescribed securities, you must deal with a person or a corporation that you are not independent from, and that you are engaged in some variety of relationship with.
Completing Your Income Tax Return
You can report the disposition of both Canadian and prescribed securities in section three of schedule 3, Capital Gains (or Losses). Schedule 3 also helps you to calculate your total taxable gains for the year, which you are to report on line 127 of your income tax return.
To perform this calculation, you need to determine the adjusted cost base of the security. The ACB is the price that you paid to acquire the security or, if it was a gift of bonus from your employer, its fair market value at the time of acquisition.
Additionally, you need to know the proceeds of disposition. Subtracting your ACB from the proceeds of the disposition will yield your capital gains, if the result is positive, or capital losses, if the result is negative.
Adjusting for Identical Property
If you buy and sell the same securities several times within a year, the CRA requires you to average the purchase prices of the identical properties and use the average as your ACB when calculating gains or losses.
Rather than averaging numbers in section three or Schedule 3, add or subtract adjustments as needed at the bottom of the schedule. If you need to make an adjustment, make note of it in box 42 of the relevant T3 slip.