Canadian Capital Gains, Deductions, and Income

Posted on Mar 4, 2025 in Business Administration and Innovation Management

Capital Gains and Capital Losses

POD – ACB = CG * RATE = TCG

Carry back losses 3 years, carry forward indefinitely.

Adjustments to ACB

• Government Grants: Deducted from ACB.
• Superficial Losses: If an identical asset is acquired within 30 days, the loss is disallowed and added back to the ACB.
• Stock Option Benefit: Employment benefit included in income is added to the ACB of shares.
• Negative ACB: If ACB becomes negative due to adjustments, the negative amount is added to income as a capital gain, and ACB is restored to $0.

Non-Refundable GST/HST/PST Amounts

Add PST amounts and GST/HST on exempt supplies to ACB if they are not refundable.

Identical Properties

When acquiring identical assets at different times, calculate the ACB using the average cost.

Partial Dispositions

Allocate ACB on a reasonable basis, usually based on the percentage sold. For example, if 10% of an asset is sold, reduce the remaining ACB by 10% and allocate it to the ACB of the partial asset sold.

Capital Gains Reserves

If all proceeds of disposition (POD) are not received in cash in the year of disposition, capital gain deferral is possible.

ITA 40(1)(a)(iii) limits the reserve to the lesser of:

• [(Total Gain) * (Proceeds Not Receivable / Total Proceeds)]
• [4/5 of Total Gain in Year 1], [3/5 in Year 2], and so on.

Maximum reserve is allowed over 5 years because of the second calculation.

Bad debt is treated as a capital loss.

Sale of Real Property

Limit the POD of the building. Add potential terminal loss to the POD of Undepreciated Capital Cost (UCC) and subtract from the POD of Taxable Capital Gain (TCG).

Principal Residences

Exemption Calculation: A – (A * B/C)

• A = Total Capital Gain
• B = Years designated as principal residence + 1
• C = Number of years you owned the home
• Note: B/C cannot be greater than 1. Count partial years.

Personal Use Property (PUP)

• Gains are included in income at 50%. Losses are not deductible.
• Minimum POD = $1,000; Minimum ACB = $1,000.
• Do not net losses against gains; only gains are included, losses are lost.

Listed Personal Property (LPP)

Includes works of art, jewelry, rare books, stamps, coins, and paintings.

• Gains are included in income at 50%.
• Losses can only be applied against other LPP gains.
• $1,000 rule applies (minimum POD and ACB).
• If LPP losses exceed LPP gains, carry them back 3 years or forward 7 years to a year with a net TCG from LPP.

Deferral on Small Business Investments

Eligible Small Business Corporation

• Investee must be a small business corporation (Canadian-Controlled Private Corporation – CCPC).
• Assets cannot have a carrying value exceeding $50 million.

Qualifying Disposition

• Sale of an eligible corporation (small business corporation – CCPC).
• Shares must be held for at least 185 days.

Replacement Shares

• Acquired within 120 days of the year-end.
• Must be designated as replacement shares.

Permitted Deferral

• Limited to the gain multiplied by the lesser of the cost of new shares and POD, divided by POD (cannot exceed 1).
• Deferral = CG * (Lesser of Cost of New Shares or POD of New Shares) / POD of Old Shares

ACB Reduction: The permitted deferral is subtracted from the cost of the replacement shares.

Deferral on Replacement Property

Involuntary Dispositions

Includes fire, theft, expropriation.

• No Election:
  • Capital Gain = POD – ACB
  • Recapture = UCC – Lesser of Cost or POD
  • Cost and UCC of the new building is the amount paid.
• With Election:
  • Capital gain and recapture are eliminated if the cost of the new building exceeds the POD of the old building.
  • New Cost = Amount Paid – Capital Gain Deferred
  • New UCC = Revised Cost – Recapture Deferred

Replacement

• Must occur within 24 months after the year in which the disposition took place.
• If the purchase is not in the year of disposition, include the TCG and recapture in income in the year it occurred.
• If the cost of the new building is less than the POD of the old building, the capital gain is reduced by the difference.
• Recapture is reduced if the cost of the new building is greater than the UCC + Recapture Deferred.

Voluntary Dispositions

• Applicable to former business property (real property used in the business only).
• Replacement must occur by the end of the first year after disposition (12 months).
• Same calculations as involuntary dispositions.

Election on Canadian Securities

• Allows all sales of Canadian Securities treated as capital property; profits are capital gains, and losses are capital losses.

Individual Inclusions

Pension Benefits

• OAS, CPP, and RPP received.

Retiring Allowances

• Include 100% in income.
• Deductible if transferred to an RRSP:
  • $2,000 per year for years worked for this employer before 1996.
  • Plus $1,500 per year for years worked for this employer before 1989 and had no RPP or DPSP with this employer.
  • Count partial years.

Income from Deferred Income Plans

• Death Benefit Received:
  • Include only amounts received greater than $10,000.
  • One $10,000 exemption per death.
  • Spouse receives $10,000 first.
• Payments Received from RRSPs.
• Payments received from DPSPs.
• RRIF withdrawals.
• Home Buyer’s Plan ($35,000 RRSP Withdrawal for a first home):
  • Deficient repayments are added to income.
  • Minimum annual repayment required (15-year repayment); otherwise, the amount is included in income.
• Lifelong Learning Plan ($10,000 annual withdrawal from RRSP for full-time training, max $20,000 total):
  • Deficient repayments are added to income.
  • Minimum annual repayment required (10-year repayment); otherwise, the amount is included in income.

Other Deductions

Scholarships

• Amounts received are exempt.
• Exemption limitations for post-secondary education (excluding post-doctoral fellowships).

Research Grants

• Included in income.
• Reduced by research costs.

Social Assistance

• Included in net income.
• Deducted from taxable income.

Workers’ Compensation

• Included in net income.
• Deducted from taxable income.

Individual Deductions: CPP – Self-Employed

Self-employed individuals must pay both employer and employee portions of CPP.

• Maximum 2024 contribution: $8,112 ($4,056 * 2).
• Maximum tax credit for 2024: $3,218.
• The balance, $4,894, is a deduction.

If not self-employed, the amount paid is a credit.

• Maximum contribution: $4,056, with a maximum credit of $3,218.
• Deduction for the difference: $838.

Individual Deductions: Moving Expenses

Eligible Moves:

• Move to a new work location.
• From an old work location.
• From full-time attendance at a university or college.
• From unemployment.
• Move to full-time attendance at university.

Move must be greater than 40 km and within Canada.

Deductible Expenses:

• Travel costs (employee and family, vehicle, airfare, food, lodging).
• Moving household effects and storage.
• Meals/lodging at the new or old residence (15 days), not part of the move above.
• Lease cancellation costs.
• Selling costs for the old residence (commissions).
• Costs of acquiring a new residence (legal fees).
• $5,000 for interest, taxes, insurance, and utilities of the old residence while trying to sell.
• Cost of revising legal documents, changing driver’s licenses, and connecting utilities.
• Maximum moving expense deduction is limited to employment income earned; excess can be carried forward.

Tax Planning

Important if costs are shared with the employer.

Employer pays for non-deductible costs:

• Cost of visits to the new location (not a taxable benefit).
• Loss on the sale of the old house:
  • First $15,000 is exempt.
  • 50% of the excess over $15,000 is a taxable benefit.

Individual Deductions: Child Care Costs

Eligible Child

• Under 16 at some time during the year.
• Older, but mentally or physically infirm.
• Income less than $15,705 if not your child.

Costs must be supported by receipts.

Generally deducted by the lower-income spouse.

Cost Limits (Least of 3 Amounts):

• Annual Limit:
  • $11,000 if eligible for the disability tax credit (any age, including blindness).
  • $8,000 if the child is under 7.
  • $5,000 for:
    • Children aged 7 to 16.
    • Children over 16 with a disability but not eligible for the tax credit.
• Actual Costs Plus Periodic Limit (Overnight Stays at Camp):
  • $275 per week if eligible for the disability tax credit.
  • $200 per week if the child is under 7.
  • $125 per week for:
    • Children aged 7 to 16.
    • Children over 16 with a disability but not eligible for the tax credit.
• 2/3 of the earned income of the lower-income spouse (employment and business income, scholarships, and research grants).

Related Inclusions and Deductions

Employment Insurance

• Receipts are included in income.
• Repayments are deductible from income.

Pension Income Splitting

• Up to 50% of pension income can be re-allocated with a spouse.
• Includes RPP, RRSP, and RRIF income.
• Excludes OAS and CPP.
• First, include pension in income.
• Then, deduct the amount split with the spouse.

Child Support

• Not deductible to the payor spouse.
• Not taxable to the recipient spouse.

Spousal Support

Taxable to the recipient and deductible to the payor if:

• Paid to a spouse or former spouse.
• Living apart.
• Paid pursuant to a formal agreement.
• Made on a periodic basis.
• Recipient has discretionary use of payments.

Additional Considerations

• The recipient of child support can still claim a credit for an eligible dependent.
• An individual deducting support payments cannot claim a credit for a spouse or eligible dependent.