Capital Gains Tax

Disposing of capital assets ?

If you dispose of capital assets and provide financing to the purchaser, you are entitled to a reasonable reserve for Canadian Income Tax purposes in computing your capital gain. The maximum amount of the reserve is 20%, meaning the capital gain has to be recognized over 5 years.

Capital Gains inclusion rate reduced.

The October 17, 2000 mini-budget reduced the capital gains inclusion rate for Canadian income tax purposes from 66 2/3% to 50% effective immediately.

Donating an interest in a personal residence to a charity ?

Individuals with grown children who own their own homes or with no children should consider donating an interest in a personal residence to a charity. If the donor wishes to continue to have use of the property for the remainder of his or her lifetime, a residual interest in the property could be gifted to the charity currently without the use of a trust. The donor will receive an income tax receipt for the value of the residual interest transferred. Provided that the home is a principal residence, there will be no taxable capital gain

Tax-free rollover of capital gains on disposition of shares

New Canadian income tax rules provide for a tax-free rollover of capital gains on disposition of shares of certain active Canadian corporations where the proceeds are used to invest in shares of another active Canadian corporation.

Transferring money to a minor child

If you transfer money to a minor child and it earns capital gains instead of interest or dividends, the capital gain would be reported on your child’s tax return, not on yours, thereby reducing the family’s overall Canadian income tax liability.

Rental income from your principal residence

If you earn income from your principal residence, for example from renting a room, your principal residence will still be exempt from Canadian income tax on any capital gain rising on disposition provided the income is incidental to your use of the property, you make no structural changes to the property and you don’t claim capital cost allowance (depreciation) on the property.

Non-arm’s length disposition of capital property

A non-arm’s length disposition of capital property such as a rental property, for example a transfer to a child, is deemed to take place at fair market value for Canadian Income Tax purposes. If you transfer property that has appreciated in value you will have to report a capital gain of fair market value less cost.

Negotiating the sale of a business?

When negotiating the sale of a business it is important to remember that the capital gains exemption from Canadian income tax is only available on the sale of shares, not on the sale of assets.

Small business capital gains exemption

If you are planning to sell all or a part of your business try to structure the sale to be eligible for the small business capital gains exemption available for the sale of shares of a qualifying small business corporation.

Sale of qualifying small business shares

To maximize the $750,000 Canadian capital gains exemption from Canadian income tax on sale of qualifying small business shares (QSBC) available to every individual, consider having your spouse invest in the corporation to multiply the availability of the tax exemption.