Capital Gains

LINE 127 - TAXABLE CAPITAL GAINS

PLEASE NOTE - The government's CAPITAL GAINS TAX GUIDE will be a great help to anyone with a Capital Gains problem. Be sure to pick up one of these guides from the tax office. If you do not have easy access, you may order one from the TAX FORMS DIRECTORATE, 875 Heron Road, Ottawa, Ontario, K1A 0L8.

This book is being re-written. In the mean time you should check out the Capital Gains page where you'll find links to resources, tax case examples, questions and answers, and forms, etc. david

In 1985, the Government changed the Capital Gains Schedule to Number 3 and has many computer input numbers for totals. A perusal of the numbers on schedule 3 will show you the numbers that the computer works on. If you do prepare a separate schedule to submit your capital gains on, it would be wise to arrange it in such a way that the numbers used by the computer identify the type of gains that you have. The less time a real person has to spend interpreting your schedule, the better.

See the back of the manual for samples of forms T2017 (reserves) and T657 (capital gains exemption) and T936 (Cumulative Net Investment Loss - CNIL). These forms are exceedingly difficult. If you are involved with the filling out of these forms, I advise you to seek some help with your return.

 

1988 - 1989 - 1990 - ADJUSTED NET CAPITAL LOSS AMOUNT

In 1990, the "taxable percentage" of realized capital gains received changed from 66 2/3% to 75%. Capital losses also changed from 66 2/3% to 75%.

In 1988, the amount of capital gains which is taxable changed from 50% of the gain to 66 2/3% of the gain. At the same time, Capital Losses increased from 50% to 66 2/3% of the gain. This creates total confusion when it comes to carrying losses back. Mr. Wilson and the conservative party should have called it the Tax Consultants goodwill and retirement fund. Because of this difference in percentage, it is necessary to adjust the amount of losses to equal the amount of gains on a yearly basis. i.e., if you made $1,000 taxable gain in 1985, you need $1,333.33 of allowable capital losses in 1988 and 1989, to offset the $1,000.00 in 1985.

If you are carrying losses forward from a prior year, you must adjust the amounts in reverse, i.e., $1,000 of loss in 1985 cancels $1,333.33 gain in 1988 and 1989.

In other words:

 

1.    If you are applying net capital losses of prior years (72 TO 87) to 1988, or 1989 multiply the amounts by 4/3. If you are applying the losses to 1990 or 1991, multiply by 3/2. This is confusing but it works. Watch:

 1.    $50.00 capital loss.

 1.    $66.67 capital loss.

 1.    $75.00 capital loss

Losses can go back three years or forward indefinitely.

 

1.    If I make a $100.00 Capital Gain in 1990/91, I have a "taxable" gain of $75.00. To apply this 1990/91 taxable $75.00 gain to a 1987 deductible $50.00 loss, I multiply the 1990/91 gain by 2/3 and get $50.00. Or I multiply the 1987 Loss by 3/2 and get $75.00.

 

1.    To apply a 1990/91 taxable $75.00 gain to a 1988 deductible $66.67 loss, I multiply the 1990/91 gain by 3/4 and get $66.67. Or I multiply the 1988 loss by 4/3 and get $75.00.

 

1.    To apply a 1989 taxable $66.67 gain to a 1987 deductible $50.00 loss, I multiply the 1989 gain by 3/4 and get $50.00. Or I multiply the 1987 loss by 4/3 and get $66.67.

 

1.    If you are applying a 1988/89 net capital loss to 1985, '86 or '87, multiply the amount to be claimed by 3/4.

Of course, if you have a pre-May 23rd, 1985 capital loss, you may apply the lesser of $2,000 or the unapplied loss against other sources of income. Put your claim on line 253, page 2 of the T1 Return. (do not try and use the T1 Special return, use the long form).

 

Your calculation should look something like Example 1.

*** YOU MUST DO A SEPARATE CALCULATION FOR EACH YEAR FOR WHICH YOU ARE APPLYING NET CAPITAL LOSSES ***

Use the calculation in Example 2

DO NOT FORGET

 

1.    Net capital losses of earlier years must be claimed first. You must apply `pre-May 23, 1985' losses before after `May 22, 1985' losses. This has the effect of reducing your immediate deductions because you cannot use some 1987 losses against 1988/89/90 income and still claim the $2,000 loss on line 253 for the pre-May 23rd loss.

 

1.    Therefore, if you are applying net capital losses to 1988 or 1989 or 1990 or 1991, the amount at line 7 above is the maximum amount which you can apply to line 253 of the current year.

 

1.    To apply a 1991 capital loss to a prior year, you must fill out and include a form T1A (Request for loss carry back) which you will find reproduced at the end of this chapter.

 

 

Try Example 3 if you are applying 1989 losses backwards

he previous worksheet refers to the years 1986, '87, and '88 when talking about the calculation for 1989. The reason is that capital losses may only be carried back three years. For 1990, carry backs are to 1987, '88, and '89.

 

OR

If you deducted a pre 1989 net capital loss in 1989, use the worksheet in Example 4 to calculate your remaining balance of unapplied net capital losses.

You  should keep separate balances for each year.

 

NOW, ON TO GENERAL INFORMATION ABOUT CAPITAL GAINS

In most cases, for stock transactions, a single total off your broker's statement will suffice. For purposes of calculating capital gains and losses, I prefer to use my own personal asset inventory form (see example) which makes it a lot easier to determine gains or losses using the median rule or valuation day method. The result of the calculations on the inventory should be entered in the appropriate place on the government's Schedule 3, a sample of which is also provided.

 

If you do intend to invest in real estate make sure that you show an intention to hold on for a long time. Do not lie to the banker to get the mortgage; i.e., telling the bank manager you intend to buy and fix up and sell (so that he or she will give you a loan), when you really are just trying to get hold of a house to live in, will guarantee that you will pay full rates of tax on that house in the future. And you don't have any credibility - you either lied to the tax office or the bank, each of which is a fraudulent act . I had a case similar to this in 1988. During the noon recess, I was cautioned by the judge on proceeding. It was obvious that the taxpayer had perjured himself at least once, either with the bank, or with the tax office. Since perjury is a worse offense than tax evasion, one must be careful and honest .

The situation is really stupid because of Section 39(4) of the Income Tax Act. This section allows a person who is not a stockbroker to elect to treat stock transactions as capital gains or losses instead of straight income profits or losses. So we end up in the position where one client with over two hundred stock transactions and a $50,000 loss was only allowed to right off $2,000 as a capital loss and a single accidental profit of $50,000 on a lot he bought to live on (and from where he got the $50,000 to lose in the stock market) was taxed as straight income.

Please do NOT take any of this for granted. Go to your tax advisor and after he or she has given you an opinion, ask to see some sample tax cases of other peoples' tax problems. Read the cases yourself (it will only take an hour) and decide for yourself whether the opinion you have received is really correct. My experience is that most people look at this with wishful thinking and when I show them the cases, they change their own opinion as to the likely consequences.

Too many big words, and very confusing! What is a "capital gain"? A capital gain is best described as an increase in the value of an asset when you do not really have any control over whether the value of the asset will go up or down, and where you do not normally "trade" in that asset as your source of income.

You can see that the situation becomes very difficult when it comes to such cases as the stock market or the "entrepreneur" who buys an old house, lives in it while fixing it up and working at another job, and then sells the house at a profit. In many instances, gains that are normally considered capital gains become, in the case of stockbrokers who play the market, ordinary business income and are taxed at full rates. Furthermore, the tax-free gain from the sale of an "entrepreneur's" personal residence should be considered business income since, in reality, this person has a part-time business.

 

WATCH

First of all, if you sell your personal residence for a profit, you do not have to pay any capital gains. In the U.S.A. it is quite different. There, as a rule, if you sell your personal residence, you pay tax on the capital gain unless you use it to buy another house. Also, if the new house that you buy costs considerably less than what you received for the old one, there is often a taxable capital gain. The U.S. also makes provision for short term capital gains (taxable at the full income rate) for assets kept less than a year, and for a minimum tax when the total amount of long term capital gain exceeds certain criteria. In Canada though, it is another case of the rich getting richer and the poor not having a chance.

For example, if John owns a $100,000.00 house which he sells five years later for $150,000.00, he has $50,000.00 tax free, the equivalent of earning $100,000.00 at a job. George, on the other hand, has a $30,000.00 house he sells for $45,000.00, a tax-free profit of $15,000.00, the equivalent of about $22,500 earnings. This is hardly fair and is against the philosophy of our much-abused Carter Commission on taxation.

 

OPINION

With regard to "how many houses", there is just no pat answer. If people keep on buying houses, fixing them the way they think best and, after finishing, decide that they do not like the result, why shouldn't they sell and start over on other houses? But when is it a matter of disliking the finished product, and when is there an intention to make tax-free capital gains which are really very thinly disguised part-time business earnings? It is a matter between your conscience and the tax department.

 

You'll find more examples and answers on the new Capital Gains page - david

However, in December 1988, Harjit Atwal (I was his agent) was forced to pay full tax on a house which he built and lived in for a short while. He was a contractor at the time and built four similar houses for sale and one dissimilar house with a basement, etc. which he moved into. The judge ruled that he had not proven it was built for a personal residence.

 

In November, 1991, John and Valerie FALK They had had three houses in 8 years from 1980 to 1988. Revenue Canada Taxation tried to tax them on the second house they sold in 1985. The Tax Court of Canada ruled against Revenue Canada but Revenue Canada still tried to tax the house. Therefore, it should be obvious that you cannot "sell one a year", or move back into the rental house for a month to make it tax free. In fact, moving into the house to make it tax free, "triggers" a tax liability although it can be delayed.

 

ADJUSTED COST BASE

Adjusted cost base usually refers to the original cost of an asset but, as the term implies, it may be adjusted by the owner for such things as the cost of improvements and additions in the case of a building, or annual property taxes and interest on undeveloped LAND. ( NOTE. Undeveloped land must be held for development by a full time developer for interest and taxes to be written off. If you are a developer, the land will be taxed at full rates because it is a business action, not a capital gain).

In every case, these expenses cannot be deducted from normal income. It should be obvious here that, in the case of interest, every effort should be made to arrange your affairs to make this item deductible in the normal course of events, as there is a full deduction by deducting from income rather than by adding it to the cost base to give yourself only half the credit some years down the road when the dollar is worth less.

Please note that cases mentioned in my TAX GUIDE show that judges are ruling against the deduction of taxes and interest on vacant land as either a straight deduction or by adding them to the adjusted cost base to decrease the capital gain. In the Sterling case in 1985, the Supreme Court (by refusing to hear it) ruled against the deduction of interest for the purchase of gold. IN 1987, THE SUPREME COURT RULED AGAINST THE BRONFMAN ESTATE FOR THE PURPOSES OF DEDUCTING INTEREST WITH "SUBSTITUTED SECURITY".

 

 

 

PERSONAL-USE PROPERTY AND LISTED PERSONAL PROPERTY

Personal-use property can best be defined as property that is valuable, but is used mainly for personal convenience or pleasure. If you lose money on personal-use property, as most people do with such items as boats, cars, planes, and household effects, you cannot deduct the loss. However, if you own personal-use property which you sell for over $1,000.00 and you make a profit over the adjusted cost base, you must pay capital gains tax on two thirds of the profit. In making the calculation, if your cost for the particular property was less than $1,000.00, your adjusted cost base is $1,000.00. I find the most common articles on which profits can be made are antiques, although the tax office will also be checking the sales of fiberglass boats now, as their prices have risen by a phenomenal amount in the last few years. Also, if you have a vacation property by the beach which you sell at a loss, there is always the likelihood that the tax department may choose that this is a personal-use property for which you cannot claim a loss. Listed personal property is a special kind of personal-use property that comes under the broad heading of collectors' items. This includes antiques, paintings, manuscripts, coins and stamps. These are treated almost exactly as personal-use property with one exception: a capital loss from listed personal property can be used to offset gains from other listed personal properties, and it can be carried back one year and forward five years to offset other listed personal losses in those years. A proposed amendment to the Income Tax Act will permit losses on listed-personal-property to be carried back 3 years and forward seven years commencing in 1984. Losses incurred in 1984 may be carried back for 2 years only. Another proposal affecting listed personal property losses will allow the tax payer to deduct any portion of the loss against gains of any taxation year in the carry over period. This amendment applies to listed personal-property losses commencing in 1983.

 

SPECIAL NOTE

 

PRINCIPAL RESIDENCE

This has always been a confusing one and to enhance that situation the department has changed the rules again. A family is allowed one residence tax free commencing January 1, 1982. Therefore, a family may no longer enjoy a summer cabin plus the family home tax free. For those of you owning summer or winter cabins it would be very worth while obtaining appraisals on your real estate holdings as of January 1, 1982. Trying to sort out the January 1, 1982 market value of the cabin when you sell it ten or twenty years from now is going to be a very real, and likely expensive problem. Remember though, what you think is your principal residence for tax purposes can be ruled against by DNR. To claim your residence tax free, fill in form T2091 in back of this book.

 

TIP

Many accountants have been telling their clients that they should cease to claim offices in their homes. I have not yet worked out a case where I feel it is to the taxpayer's advantage to postpone a claim for an expense today in the hopes of an expected gain some time in the future. Let me work out a simple example here. BULLETIN IT-120R3 STATES that the Department will not try and tax a residence where there have been no structural changes involved with the renting of a couple of rooms or the incidental use as an office.

If your yearly expenses for interest, taxes, repairs and maintenance, heat, and light are $6,000.00 (about right for a $57,000.00 house with a $45,000.00 mortgage), and you use 20% of your house for business use (office and storage), then you would deduct $1,200.00 from your income this year and, theoretically, every year for 10 years at least because as the interest goes down, taxes and maintenance go up. The $1,200.00 deduction this year in a $20,000.00 tax bracket would be worth just about $600.00 in real money savings in one year. Over 10 years this would be worth over $6,000.00 less tax, and over 20 years $12,000.00 less tax, plus whatever earnings you made from investing the tax money you had saved.

Remember though, the above only applies for the 85, 86 and 87 tax years. Beginning in 1988, an office in the home must be necessary, a private, separate room, and be visited by clients regularly or the claimants principal place of work such as an author's den or a painter's studio. This means that `records offices' are going to be difficult if not impossible to claim and get through. (see Office in the Home section for more details and examples).

 

 

WATCH OUT

I also mention here that there is a four-year provision that allows your principle residence to be rented while you are away without changing its classification. The four years need not be consecutive; you could have been away in 1974 and 1975 and then returned for six months in 1976 before moving away again for another two years. If you are in this position you should file an election under Section 45(2) of the Income Tax Act indicating that your wish is to continue using the property as your principal residence and that you have not changed its' use to rental property. Failure to file this election could cost you thousands of tax dollars.

If you are transferred and meet certain other requirements you may designate your home as a principle residence forever. Check with your tax consultant, as the rules are continuously changing in this area. Be particularly careful IF YOU ARE TRANSFERRED OUT OF THE COUNTRY and try and claim tax free status as a non-resident. This means that the old family house left behind becomes taxable in Canada and possibly in the other country as well (particularly if in the U.S.).

 

STOCKS, BONDS AND SECURITIES

The person who has extensive dealings in speculative stocks should be keeping proper records of all these transactions for capital gains purposes, showing the number of stocks and their value carried forward from the previous year, as well as the number of stocks traded (bought or sold) and the amount of each of these transactions. The transactions should be listed in date order.

If you have shares of a particular class in a company which you acquired before Valuation Day (December 22, 1971 for publicly-traded shares, December 31, 1971 otherwise), when you sell these shares you are deemed to have sold these on a FIFO (First-in, First-out) basis. After these are gone the identical property rules apply, and the value of each share you hold is the average cost of all of the identical shares you hold. This average will change every time you conduct transactions with these identical shares.

 

CAPITAL GAINS - CAPITAL OR PROFIT? $500,000 EXEMPTION - still there? for some!

The old May 23, 1985 budget proposed a lifetime $500,000 capital gains exemption for each Canadian Taxpayer. At first glance it seemed like the giveaway of the century. However, it did come with a mixed blessing because along with the exemption came a concerted effort by the Department of National Revenue to make what some people think are capital gains into straight income. Confusing? - not at all, and as actual tax cases at the end of this section will show, just a renewal of an old argument.

On June 18th, 1987, Mr. Wilson took away the $500,000 for everyone but farmers and small business people. They will still get up to $500,000 when selling out the farm (now) or the small business (from 1988 on, shares must have been held for 24 months, so you cannot incorporate and sell off before 24 months are up). Everyone else is limited to $100,000 and there is now a new wrinkle.

However, you can sell a "working" family farm to a big city developer and claim it tax free for up to $500,000 for each owner.

In cases where monies borrowed have created investment losses for what was considered to be future capital gains, the losses must be deducted against the capital gains exemption. Therefore, it is possible to lose the exemption all together for the future. Please note that, in any case, it is necessary to fill out a form T657 for 1988 and a T936 for 1989 to show this CNIL (cumulative net investment loss).

PLEASE ALSO NOTE: To get the Capital Gains Exemption, your return must report the gain and "claim" the exemption on a T657. IF YOU DO NOT REPORT IT BECAUSE IT WASN'T TAXABLE "AND" DNR catches up to you, it will be too late to claim the exemption and you will have to pay tax on it. This is a penalty provision to stop taxpayers from "just overlooking" a gain on the chance that if it is overlooked, they might be able to claim the full gain in the future because they don't have a form on file. I continuously run across people who have been told by friends and even accountants that they will not bother reporting this because it "isn't taxable anyway". Not reporting it is the fastest way to make it taxable.

 

 POSSIBLE EXTREME CASE:

A person borrows $100,000 at 12% to buy stock. The stock pays $2,000 a year taxable dividends for the next ten years, resulting in a loss each year of $10,000. At the end of ten years the person sells the stock for $200,000 and earns a $100,000 ` capital gain '. The ten years of losses at $10,000 a year adds up to $100,000. The $100,000 losses must be netted out against the $100,000 capital gain exemption leaving an exemption of zero. Therefore, the person would have to pay tax on 75% of the capital gain. (from 1990, 75% of capital gains will be taxed .

A less onerous situation would be as above where the person receives $10,000 a year taxable dividends. At the end of ten years there would be a cumulative loss of $20,000 which would be netted out against the $100,000 capital gain exemption. There would be $80,000 left and the person would have to pay tax on 75% of the $20,000, or $15,000.

Remember, for 1988 and 1989, the percentage of Capital Gains Taxable goes from 50% to 66 2/3% and then to 75% for 1990, so ten years from now it will be 75% taxable.

An important note is that as of Dec 31, 1987, the ability to transfer $200,000 of stock in a family business to the children "At Your Cost Base" expired.

 

WHAT IS A CAPITAL GAIN?

A capital gain is a gain which comes without effort on your part. It usually is a result of inflation, not of the marketplace, although you could say that inflation is a result of the marketplace, particularly when it refers to land and the demand for specific land. For example, waterfront or downtown commercial real estate makes some land far more expensive than the same amount of land in another area.

Fifty years of tax law show that if you buy it wholesale and sell it retail, it is very difficult to claim capital gains treatment.

 

HISTORY OF THE PRESENT SITUATION

 

Up until 1972, a sale was either a tax free capital gain or it was taxable at straight income tax rates as a venture in the nature of trade. In 1969, Keele Dufferin Acres Ltd. had bought a 92 acre farm which they farmed for about four years. They then received an unsolicited offer to buy the farm, and made a profit in excess of $150,000 which they tried to claim as a tax free capital gain. The Tax Appeal Board ruled that the gain was taxable as a venture in trade at full tax rates, even though it was an isolated transaction.

 

In 1973, Anderson, Beckingham, McDonald and McDonald were all taxed as straight income on the purchase of a parcel of land outside of Edmonton. Even though it was an isolated transaction, they had obtained their advice from a noted real estate speculator, and the court ruled that though it is possible that a similar transaction `could' have been a tax free capital gain, it was unreasonable in this case to think that the investors bought with any idea other than resale at a profit.

 

FAMILY HOME TAXABLE

Neither is the "family home" free of tax in the right circumstances.

 

In 1978, John Welton was taxed at full rates on a $66,000 profit from the sale of his fifth personal house in 13 years. His regular occupation was that of building contractor. The Tax Review Board ruled that his past conduct showed a clear intent to buy, build, live in and sell at a profit.

 

In December 1988, Harjit Atwal (I was his agent) was forced to pay full tax on a house which he built and lived in for a short while. He was a contractor at the time and built four similar houses for sale and one dissimilar house with a basement, etc. which he moved into. The judge ruled that he had not proven it was built for a personal residence.

 

In December. 1991, in the Case of FALK vs the Minister of National Revenue , Mr. Falk won his case. He had had three houses in 8 years from 1980 to 1988. Revenue Canada Taxation tried to tax him on the second house he sold in 1985. The Tax Court of Canada ruled against Revenue Canada but Revenue Canada still tried to tax the house. Therefore, it should be obvious that you cannot "sell one a year", or Move back into the house for a month to make it tax free. In fact, Moving into the house to make it tax free, "triggers" a tax liability although it can be delayed.

You can see that one buy or sell could be a venture in trade and taxable at full rates, and that the supposedly "sacrosanct" family home is not always tax free either, but WHY THE BIG PROBLEM?

Well, as I implied before, the question of capital gain versus straight income was becoming quite clear by the start of the seventies. There were years of tax law to work with, and then the legendary monkey wrench got thrown into the works. In June of 1971, The Minister of Finance introduced Capital Gains tax at full rates on 50% of the gain beginning January 1, 1972.

The tax office became so engrossed in collecting the new tax that they ceased to pay as much attention to the difference between capital gains and straight income. As a consequence, for about eight years, profits which would have been taxed as straight income under the old act, snuck through as capital gains at half rates. Then in 1980/81 DNR started to crack down on straight income again. In fact, they went overboard and attacked every single sale that they could find, particularly in the west, where fantastic profits were being made by "flippers".

Unfortunately for DNR, by the time they did crack down, the losses were flowing like blood in a slaughterhouse, and the government ended up giving out as many or more dollars for the straight losses as they collected from the few people that they managed to tax at straight income.

Those losses have now been established and the real estate market in Canada is strong. In fact, collectively, Canadian Real Estate has increased in price 80 out of the last 86 years.

Concerning the Stock Market, Section 39 (4) contains an election which allows stock market investors (who might make 50 trades in a year) to elect to treat themselves as capital gains investors, rather than as traders. This election excludes professional stock traders and certain officers and directors, but it is there and makes the rules different between real estate/all other investments and the stock market.

The tax act defines "any buy/sell" as a venture in trade, and gives the election exemption for the stock market and for the family home. This means that by the very definition, any single buy/sell in real estate that you do not live in is taxable at straight tax rates. Lets face it. We would look pretty stupid in court telling the judge that we didn't buy the real estate or the stock to make a profit.

So what does this mean?

What it means is that you are going to have a hard time getting that $100,000 or $500,000 lifetime exemption. The tax office has a policy of going after investors in the stock market and making them traders based on the volume or number of trades or the position of the purchaser/seller relative to the companies involved. In 1984, Louis Wolfin and Frobisher Securities Ltd. were denied the benefits of section 39 (4) and Capital Gains Tax treatment. The Tax Court of Canada ruled that the activities of Mr. Wolfin were such that he personally was responsible for the increased values of the shares he bought and sold in his own name and that of Frobisher Securities Ltd. Both Mr. Wolfin and Frobisher Securities have appealed the case to the Federal Court - Trial Division.

 

A TRUE STORY THAT DID NOT MAKE IT TO COURT but took a year to fix.

The combination of differing treatments of stock trades and real estate trades can create situations which sound or read like Saturday morning cartoon shows, if it was not for the worry and heartache for the people involved. In the following case, which took over a year to solve, the taxpayer involved was driven to seek bankruptcy counseling, his marriage was "almost" destroyed, and another citizen wonders "why me??".

What happened? My client bought a lot with acreage in a rural community. He bought the lot to build a house on for himself, his wife, and his children. However, a series of murders and other circumstances caused his wife to decide that she did not want to live in that area. It seemed fortuitous. He sold the lot and acreage at the top of the market and made a $50,000 profit. He took a small part of the money (a mistake as he should have paid cash) and put it down on another lot on which he promptly built at the top of the market... (i.e., although he had made a big profit in cash, he signed for a large amount of money at the peak)... and moved wife and family in. But now that he had some `real money' to work with he was going to make his fortune. An advisor told him to buy an Income Averaging Annuity Contract (IAAC) where he could borrow the money back out and have it to use, so he did.... (Now he has the money to spend, and doesn't owe all that tax `now').... He took his $40,000 to the stock market, made over 100 buys and sells, got up every morning to call his broker, and spent six months of his life losing the $40,000 plus another $10,000 he had borrowed... This, of course covers two fiscal years of tax which we will call `80 and '81. He now has a $50,000 capital loss in '81 which he can apply against the $50,000 capital gain in '80, and does not need his IAAC anymore. In trying to stop the taxing provisions of the IAAC, he triggers an audit.... The assessor taxes him 100% on the profits on the lot (an isolated instance bought for personal use and tax free if he had built right away) and only allows a $2,000 capital loss for the $50,000 stock market loss to which he has devoted six months of his life and has NOT EVEN MADE a Section 39 (4) ELECTION TO BE TREATED AS A TRADER.

THANKFULLY, although the local branch was unreasonable, and frustrating, a NOTICE OF OBJECTION ( T400A ) resulted in an appeals officer reversing this inequity without having to go to court. Our argument was that the lot was Capital Gains and that, if a change was to be made, it should be to allow the $50,000 stock loss as a business (i.e., trading) loss, which in the long run is what really did happen. My client and the Tax Office were happy to call it quits.

The IAAC was stupid legislation which has thankfully been removed. Most tax shelters are stupid with the exception of Rasp's and MURBs. When you see a B.C. Cabinet Minister resigning over his purchase of a Tax Shelter, and others losing homes, cars and reputation over purchasing Scientific Research Tax Credits which never took place, you have to realize that the inside of the deal is more important than what the paperwork looks like.

Sometimes, a deal can be a combination of capital gain and income.

 

In 1984, Dorothy May Hughes had her original loss in the Tax Review Board (in 1980) changed by the Federal Court - Trial Division. In January 26, 1973, Hughes bought an eighteen suite apartment block for $235,000. Various personal and financial problems caused Ms. Hughes to apply for strata conversion in July '73, and although North Vancouver City Council originally turned the request down, the conversion was finally approved on January 28, 1974. The strata value was appraised at $460,000 on January 15, 1974. When filing her 1974 tax return in 1975, Ms. Hughes claimed capital gains treatment for the change in value from $235,000 to $460,000 and reported straight income on the sale of the strata units over the $460,000. DNR tried to assess for straight income after the $235,000 cost, and the Tax Review Board agreed with DNR. However, the Federal Court agreed with Ms. Hughes, citing the following case, which took three court cases to settle in the taxpayer's favor. AND, as this case involved the 1967/68 tax years, capital gains treatment meant no tax.

 

In 1963, Hiwako Investments Limited, which was controlled by an individual with a long history of real estate transactions, bought a number of apartment properties in Toronto. They were sold 9 months later for substantial profits which were claimed tax free. In 1973, Hiwako lost before the Tax Review Board. In 1974, Hiwako lost before the Federal Court. And in 1978, Hiwako Investments Limited won in the Federal Court of Appeal. In settling the Hughes case above, Judge Collier quoted Judge Jackett in the Hiwako case: "an intention at the time of acquisition of an investment to sell it in the event that it does not prove profitable does not make the subsequent sale of the investment the completion of an `adventure or concern in the nature of trade'".

Please note that it took from 1974 to 1984 to settle the Hughes case above. It took from 1964 to 1978 to settle the Hiwako case. Ten years and fourteen years are nothing in tax matters. As of the date of this writing, January 4, 1992, I have been waiting 15 months for the judge to rule on my 1979, 80, and 81 tax returns (which of course affects every return from 82 to 92). The case was 10 days long and would have cost a stranger $150,000 or more for representation.

Please remember the cost and time involved if and when you decide to challenge the system.

We have now covered isolated transactions, combined transactions, and multiple transactions. We have touched on the stock market and seen that there is a large difference in the treatment of stock and/or real estate transactions. What about personal assets, like cabins, boats, cars, art and jewelry, and the family house, particularly where the land exceeds one acre.

 

Next: Capital Gains Part 2

Last Updated Friday, July 10 2009 @ 02:33 PM PDT|16,054 Hits View Printable Version

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