Understanding the tax consequences when disposing of capital property can help you save on your taxes. It is also a significant consideration in estate planning due to deemed dispositions for deceased persons.
What Is Capital Property?
Common types of capital property include:
- securities such as stocks
- equipment used for the operation of businesses or rentals
This includes depreciable property, which is typically seen as capital property used to earn income from a business or property whose capital cost can be written off as Capital Cost Allowance over a number of years. It also includes any property that, if sold, would result in a capital gain or a capital loss. It is usually bought for investment purposes or to earn income, and does not include the trading assets of a business, such as inventory. It is also worthwhile mentioning that land is not considered a depreciable capital property as set out in the classes of depreciable property by the CRA.
Capital Gains and Capital Losses
A capital gain or loss is incurred when capital property is sold or considered to have been sold for more or less than its adjusted cost base, plus the expenses involved in selling the property.
The adjusted cost base is generally the cost of a property plus any expenses to acquire it, such as commissions and legal fees. Special rules may apply that consider the cost of the capital property to be an amount other than its actual cost. While the adjusted cost base also includes capital expenditures, such as the cost of additions and improvements to the property, current expenses, such as maintenance and repair costs, cannot be counted.
In most cases, an allowable capital loss in a year is first applied against any taxable capital gain for that year. If there is a loss left over, it becomes part of the calculation for the net capital loss for the year. The net capital loss reduces the taxable capital gain in any of the three preceding years or in any future year.
Capital Cost Allowance
In the year when depreciable property is purchased, such as perhaps a building, the full cost cannot be deducted. However, since this type of property either wears out or becomes obsolete, its capital cost can be deducted over an extended period of several years. Depreciable properties are usually grouped into classes, whereby any CCA claim made would be based on the rate assigned to that particular class.
“Deemed disposition” is used when a person is considered to have disposed of a property, even though a sale did not take place. The tax treatment of capital property that a deceased person owned at the date of death involves the concept of deemed disposition. When a person dies, the Canada Revenue Agency considers that the deceased person disposed of all capital property right before death.
Disposal of Depreciable Property
For depreciable property, when the proceeds or deemed proceeds of disposition are more than the undepreciated capital cost, the result is usually a recapture of CCA that is included in income on the deceased person’s final return. When the proceeds or deemed proceeds of disposition are less than the UCC, the result is a terminal loss, which is deducted on the deceased person’s final return.
Which TurboTax Is Best for You?
Whether you are selling your home or a car you use for your business, you can smoothly navigate the tax waters to file your return with TurboTax Online.
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