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Canadians Wrestle Capital Gains Calculations

Written by Posted On Tuesday, 10 April 2001 00:00

Canadians who sold their cottage, income property or other real estate in 2000 and made a profit in the process, may be in for some dazzling mathematics as they complete their 2000 income tax return. This profit or capital gain receives special tax treatment by the Canada Customs & Revenue Agency (CCRA, formerly Revenue Canada).

Capital gain is the profit you make on the sale of property, either personal property like stocks and bonds or real property like real estate. The costs of acquiring and disposing of the property are deducted from the profit and a pre-set portion of the balance is included as taxable income. The February 28, 2000, Canadian federal budget and the October 18, 2000, economic statement proposed changes to capital gain calculations that resulted in three periods of t

  • Period 1. Disposition before February 28, 2000, carries an inclusion rate of 75.0%.

  • Period 2. Disposition after February 27 and before October 18, 2000, carries an inclusion rate that will generally be 66.7%.

  • Period 3. Disposition on or after October 18, 2000, carries an inclusion rate of 50.0%.

As if that's not complicated enough, the CCRA applies special rules to calculate the inclusion rate if you disposed of property in more than one period. On the up-side, the capital gains provision of the Income Tax Act came into effect Dec. 31, 1971, so any profit made before this date is exempt from taxation. The most significant other exemption is one's home or principal residence.

Capital gains is usually payable when the property is sold or inherited.

If your estate's responsibility for capital gains could force your heirs to sell the property to pay the taxes, you may want to consider a few alternatives to help them keep the property.

Transfer to a surviving spouse is exempt from capital gains and the tax is deferred until that spouse's death. This only delays the inevitable though, unless property values are on the way down or have stalled.

You may be able to minimize the tax faced by your estate by selling or gifting ownership of the property to your children or grandchildren now.

No cash will necessarily change hands, even though the property is deemed sold at fair market value. Check out the tax implications carefully before you do this.

Financial repercussions may also arise using this method if your net income is increased by a capital gains inclusion. This change in net income may negatively affect your eligibility for various tax credits and benefits, resulting in a drop in 2001 income. Older taxpayers should also be concerned because Old Age Security (OAS), Guaranteed Income Supplement (GIS) and Age Credit benefits can be reduced if a substantial capital gain is claimed.

Other options include buying a life insurance policy to pay off the tax liability, establishing a trust which has your children or grandchildren as beneficiaries or setting up a corporation with your heirs as shareholders. Written agreements are recommended to ensure you retain use and control of the property during your lifetime.

Saving renovation receipts can also pay-off by reducing the capital gain. The starting point for capital gains calculations is the adjusted cost base of the property, which is determined by the value on December 31, 1971 or the cost, if it was purchased after that date, plus the cost of renovations (not just redecorating). The adjusted cost base is deducted from the capital gain along with selling costs and the appropriate portion of the gain is added to your income for that year and taxed at your personal income tax rate.

None of these tax-minimization approaches are simple. Each has advantages and disadvantages that must be weighed against your circumstances, stress levels and estate planning needs. Professional tax advice is advised, but don't get talked into something complicated just to save a few dollars in tax.

If that's not all you ever wanted to know about capital gains, check out the CCRA explanation and really have some fun.

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PJ Wade

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