TAX EFFICIENT INVESTING
MANAGING ACCRUED GAINS
©2012 The Knowledge Bureau. All rights reserved. This entire work—print, audio and online--is licensed
to AGF for use with permission. It is copyright protected and may not be reproduced by users in any
manner, or stored on any system, without prior permission. For details on reproduction policy see:
www.knowledgebureau.com.
Disclaimer: Much care has been taken to produce accurate subject matter and to trace ownership of
copyrighted matter in the material; however, the publisher will welcome any information that enables it to
rectify any reference or credit, for subsequent editions.
The material provided in this publication is provided for general informational purposes only. Laws,
regulations, policy and procedures regarding this subject are continuously changing and the information
and examples are intended as general guidelines only. This publication is therefore presented with the
understanding that neither the publisher, authors nor AGF can be held liable for any actions taken as a
result of the material presented. It is therefore recommended that professional advice be obtained before
acting on any of the information herein.
Users of the information in this module are responsible for their own actions and outcomes. AGF,
Knowledge Bureau, its authors, lecturers and publishers expressly disclaim any and all liability in respect
of any consequences.
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
CourseContent‐Instructionsforuse:
Step1:WatchtheOnlineLecture
View the audio-visual presentation for this course by logging in online. The online
lecture will open in a new window (or tab). It may take up a minute for the presentation
to load, depending on your connection speed, so please be patient.
Step2:ReadtheKnowledgeE‐Journal
Review the online E-Journal for this course.
Step3:TaketheCEQuiz
Take the CE Quiz online. A mark of 60% is required to pass the course.
A make-up Quiz is available for this course, if required.
Onsuccessfulcompletionofthecourse:
Print your certificates

Knowledge Bureau CE Certificate

Alberta Insurance Council Certificate

Insurance Council of Manitoba Continuing Education Certificate

Chambre de la sécurité financière Attendance Certificate
Needhelp?ClicktheHELPbuttonavailableonline.
1.2
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
YOUR INSTRUCTOR
Walter Harder,
President, Walter Harder & Associates
Knowledge Bureau Faculty Member
Walter Harder is a graduate of the University of British Columbia where he holds an
honors degree in Physics. Walter started his career as a high school teacher, but once he
discovered the world of income tax, he left high school teaching to join one of Canada’s
largest income tax firms, H & R Block. Walter was soon conducting management
training for managers across the country.
In 1995, Walter joined CANTAX to stabilize its software development after strategic
moves to development in Quebec were ill received. In this capacity, Walter toured
Canada each fall presenting an update on income tax and software features to
professional customers coast to coast, and so is well known to professional tax
practitioners nationally.
He is currently President of Walter Harder and Associates, specializing in tax research,
and business building tool development. Walter leads tax research and web tools
development for the Knowledge Bureau.
Reminder:
Listen to the online lecture from the instructor before reviewing the
Knowledge E-Journal.
1.3
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
COURSE 2
MANAGING ACCRUED GAINS
Online Lecture
Knowledge Journal Reading Time
CE Quiz
30 minutes
30 minutes
10 minutes
“Great Transitions Require Stewardship for Real Wealth Management.”
The Knowledge Bureau
KEY CONCEPTS AND ISSUES - WHAT YOU WILL LEARN:
You will become familiar with income tax implications of the following concepts relating
to transfers of capital assets:
•
Capital Gains and Losses
•
Valuations
•
V-Days
•
Qualified Small Business Corporation Shares
•
Qualified Farm Property
•
Qualified Fishing Property
•
Identical Property
•
Mutual Funds
•
Corporate Class Funds
•
Segregated Funds
•
Flow-through shares
•
Options
•
Real Property
•
Personal-Use Property
•
Principal Residence
•
Listed Personal Property
1.4
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
•
Stock Splits
•
Capital Gains Election
•
Deemed Dispositions
•
Reserve for Proceeds Not Due
NEW SKILLS TO BE MASTERED:
You will learn how to determine the Adjusted Cost Base of any of these types of
property:
•
Stocks
•
Mutual fund units
•
Segregated fund units
•
Flow-through shares
•
Personal use property when part of set
•
Rental property
•
Cottage with election
•
A residence owned on V-Day
LEARNING ACTIVITIES: To test the learning process, the student will answer
THREE multiple-choice questions and contemplate the role of the advisor and insurance
solutions, as required.
RESOURCES: Online Lecture, Knowledge Bureau E-Journal, Knowledge Bureau
Report, Online CE Quiz, all found in your Student Resource Centre.
1.5
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
COURSE 2
MANAGING ACCRUED GAINS
Introduction
This module will focus on capital gains and losses. A capital gain or loss is triggered
when an asset is disposed or, or is deemed to be disposed of. In addition to the sale of
capital assets, capital gains would be triggered when assets are transferred from one
owner to another (even within the family) and when transferred at death from one
generation to the next.
The basic formula for determining a capital gain (or capital loss) is:
Proceeds of Disposition – Adjusted Cost Base – Outlays and Expenses
The calculation of each gain is done on Schedule 3 on the tax return and one-half of the net
gains is taxed.
Capital Gains and Losses
In order to transfer assets efficiently, you need to understand the how the proceeds of
disposition and the adjusted cost base are determined in various circumstances and for
various types of assets. Taxes on capital gains are minimized if you can minimize the
proceeds (or deemed proceeds) of disposition and maximize the adjusted cost base.
Valuations
When a property is sold, the proceeds of disposition are generally equal to the amount
that is received in exchange for the asset. However, special punitive rules apply when the
disposition is between parties that do not deal with each other at arm’s length and where
the proceeds are either above or below the fair market value of the asset. Where such
transfers are not at fair market value only the tax department wins so such transfers
should always be made at fair market value.
When there are no proceeds, such as when an asset is destroyed or when the asset is
transferred at death, the proceeds of disposition are deemed to be the fair market value of
the asset except where the asset is transferred to the surviving spouse. When assets
transfer to the spouse (or a spouse trust), the asset is deemed to transfer at the tax cost but
the spouse may elect to have the asset transferred at fair market value.
1.6
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
V-Days
The adjusted cost base of a capital property is normally the amount it was acquired for
adjusted for any capital additions or partial dispositions during the period that the asset
was owned. However, prior to 1972, capital gains were not taxable. Thus any accrued
gains prior to 1972 are not taxable. To accommodate this, the Adjusted Cost Base for
assets owned prior to 1972 is based the fair market value on Valuation Day (V-Day). For
all capital assets other than publicly-traded shares, V-Day is December 31, 1971. For
publicly traded shares V-Day is December 22, 1971 because that is the last day they
could have been sold and the transaction completed in 1971.
Qualified Small Business Corporation Shares
Qualified small business corporation shares are shares in a Canadian controlled private
corporation whose assets are primarily in active business carried on in Canada. During
the 24 months before the sale, the shares must have been owned by the taxpayer or the
taxpayer’s spouse.
The special rule that applies to qualified small business corporation shares is that any
gain on the disposition of such shares qualifies for the Capital Gains Deduction. This
deduction exempts up to $750,000 of capital gains ($375,000 taxable capital gains) from
taxation. By structuring the shareholdings within a family both spouses could qualify for
the $750,000 exemption upon sale of the business. In most cases, the ACB of qualified
small business corporation shares will be the capital contributed when the business was
incorporated although it is possible for purchased shares to qualify as well.
When shares of a private corporation are sold at a loss, the loss may qualify as an
allowable business investment loss which is like a capital loss except that it may be
deducted against income from other sources.
Qualified Farm Property and Qualified Fishing
Property
Like Qualified Small Business Corporation Shares, gains on Qualified Farm Property and
Qualified Fishing Property are eligible for the capital gains deduction allowing up to
$750,000 of capital gains on dispositions of such properties to be exempt from taxation.
In both cases, the property must be used by a family member in the business of farming
or fishing during the 24 months prior to sale. The operation may be structured in the
form of a proprietorship, a partnership, or a corporation.
In addition to the rules applicable to Qualified Farm Property and Qualified Fishing
Property, special rules apply to the transfer of farm property to a spouse or child.
Transfers during the taxpayer’s lifetime to the taxpayer’s spouse are deemed to take place
at tax cost (i.e. ACB or UCC for depreciable property) but an election may be made to
1.7
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
transfer at FMV. For transfers to the taxpayer’s child (or parent) are also deemed to be at
tax cost, but an election may be made to have the transfer take place at any amount
between the tax cost and the fair market value of the assets transferred.
Transfers of farm or fishing property at death to the taxpayer’s spouse are deemed to take
place at fair market value, but an election may be made for the transfer to occur at tax
cost. Transfers of farm or fishing property at death to a taxpayer’s child (or parent) are
deemed to take place at tax cost but an election may be made to have the transfer take
place at any amount between the tax cost and the fair market value of the assets
transferred.
Example – Farm Transfer to Child
Jason is retiring and would like to transfer his qualified farm property to his son Kyle.
Jason is eligible for the full $750,000 capital gains deduction in respect of the farm.
The following table indicates the cost and fair market value of the farm properties to be
transferred:
Asset
Cost or UCC
Fair Market Value
Farm Land
$100,000
$1,000,000
Farm Buildings
$124,541
$200,000
Farm Equipment
$56,444
$60,000
$280,985
$1,260,000
Total
Since the transfer is during Jason’s lifetime, the transfer is deemed to take place at
$280,985 so there is not capital gain to Jason. If no election is made, the accrued gains of
$979,015 will be taxed in Kyle’s hands when he disposes of the assets. However, since
Jason could have a $750,000 gain with no income tax consequences, the minimum
amount that should be used for the transfer is $1,030,985. This amount would also be
Kyle’s ACB for the property.
If Jason were not otherwise taxable or had unused capital losses of other years, the
elected proceeds might be even higher.
1.8
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Identical Property
The most common examples of identical property are shares and mutual fund units.
There are no special elections or deductions applicable to such assets however there a
rules to determine the ACB when shares or units are sold. Because it is impossible to
tell one share of a corporation from another share in the same corporation (if they are in
the same class of shares), or to tell the difference between one unit of a mutual fund from
another in the same fund, these assets are referred to as identical properties.
To understand why special rules for identical properties are needed, consider the
following example.
Example – Identical Properties
In 2010, Lisa purchased 1,000 common shares of XYZ corporation for $6,245. In 2011
she purchased another 2,000 common shares of XYZ corporation for $10,542. In 2012
she sold 1,000 common shares of XYZ corporation. What is her capital gain on the sale?
We need to know the Adjusted Cost Base of the shares sold. Did she sell the 1,000
shares she purchased in 2010? If so, her ACB was $6,245. Or, did she sell half of the
shares she purchased on 2011? If so, her ACB was $10,542/2 = $5,271.
The rule for identical properties is that neither of these scenarios is correct. She is
deemed to have sold 1,000 shares with an ACB of the average cost of the shares she held
at the time of the sale.
Her ACB for the shares sold is thus ($6,245 +
$10,542)/(1,000+2,000) x $1,000 = $5,595.67.
The ACB of her remaining shares is $6,245 + $10,542 - $5,595.67 = 11,191.33.
Another way of looking at identical properties is to determine the ACB/share before each
purchase. The ACB per share at the time of the sale was $10,542)/(1,000+2,000) =
$5.59567. A sale does not change the ACB per share of the unsold shares (2,000 x
$5.59567 = $11,191.40 – a variance of $0.07 is caused by rounding to the fifth decimal
place).
When the sale of identical properties results in a loss, the loss may only be used to reduce
capital gain in the current year. If current-year gains are insufficient to absorb the loss,
the result is an allowable capital loss (after multiplying by 50%). This loss may be
carried back to be applied against capital gains in the prior three taxation years (use Form
T1A). If losses remain, they may be carried forward to apply against capital gains in
future years – until the year of death. In the year of death, any outstanding allowable
capital losses may be used to offset income in the year of death. If there is not sufficient
1.9
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
income in the year of death to use up the losses, they may be applied against other
income in the year prior to the year of death. If there is not sufficient income in that year
then the losses expire.
Try This Exercise #1: Identical Properties
John purchased and sold shares of XYZ Corp several times as
follows:
Transaction
# shares
Cost/Proceeds
Purchase
1,000 shares
$4,590.00
Purchase
1,000 shares
$5,125.00
Sale
1,000 shares
$6,630.00
Purchase
2,000 shares
$5,124.00
Sale
3,000 shares
$10,450.00
ACB
Determine the ACB or the shares owned after each of these
transactions. Look to the end of this module for the suggested
answers.
Mutual Funds
Mutual funds are identical properties and the rules discussed above apply to them.
However mutual funds present a special challenge when it comes to determining the
adjusted cost base. This is mainly due to the common practice of reinvesting allocated
income rather than paying it out. This is common when the investor’s goal is to increase
their wealth rather than use the mutual fund investment to provide income. When income
is allocated and used to purchase more units in the fund, the ACB of the new units is
equal to the allocated income. When mutual funds pay out their income, they may also
pay out “return of capital” in addition to interest, dividends and/or capital gains. This
“return of capital” represents a refund of part of the investor’s purchase price. It is not
taxable but it does reduce the adjusted cost base of the units.
1.10
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Example – Mutual Fund: Allocated Income
Melinda purchased 1,000 units of ABC Fund in 2011 for $11,550. Her statement for the
year indicated that, at the end of the year, she owned 1,054 units. Her T5 slip from the
mutual fund shows a total of $605 income allocated to her for the year.
When Melinda sold the units in 2012, the ACB of the 1,054 units is $11,500 + $605 =
$12,105 or $11.4848 per unit.
Example – Mutual Fund: Return of Capital
Brian purchased 1,000 units of DEF Fund in 2011 for $24,540. DEF fund pays out
income on a monthly basis. Brian’s T5 slip shows capital gains of $1,200 plus $2,400
return of capital. When Brian sells the units in 2012, the ACB of the units is $24,540 $2,400 = $22,140.
Try This Exercise #2: Mutual Fund Transactions - Reinvestment
Kelly purchased 1,000 units of LMN Fund and noted the following:
Transaction
Units
Purchase
Amount
1,000
$12,500.00
Reinvest income
21.5
$245.00
Reinvest income
18.3
$215.00
1,039.8
$13,257.45
Sale
ACB
Determine the ACB or the units owned after each of these
transactions. Look to the end of this module for the suggested
answers.
1.11
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Try This Exercise #3: Return of Capital
Joe purchased 10,000 units of FGH Fund to provide retirement
income. The fund paid out capital gains and return of capital as
follows:
Transaction
Units
Purchase
10,000
Amount
$114,500.00
Capital gains
$21,541
Return of capital
$24,000
Capital gains
$24,547
Return of capital
$22,132
Sale
10,000
ACB
$121,457
Determine the ACB after each transaction. Look to the end of this
module for the suggested answers.
Corporate Class Funds
When an investor decides that the mutual fund that they are currently invested in is not
providing sufficient returns, they may decide to invest in a different fund (even if they are
in the same fund “family). In most cases this is considered to be a disposition of the old
fund units and an acquisition of the new fund units. This will result in a capital gain (or a
capital loss) on the disposition. One exception to this rule is when the funds are
“corporate class funds”. The structure of corporate class funds allows investors to switch
from on fund to another without there being a disposition and thus no capital gains or
losses are triggered.
Segregated Funds
From the point of view of taxation of dispositions, there are few differences between the
taxation of the disposition of segregated fund units and mutual fund units.
There are some differences that arise when a segregated fund guarantee is invoked but
these are beyond the scope of this course.
1.12
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Flow-through Shares
Flow-through shares are also identical properties. When an investor purchases flowthrough shares, they are eligible to claim exploration and development expenses flowed
through to them by the company. These deductions generally equal the amount of the
capital invested. The special rule that applies to flow-through shares is that the ACB is
deemed to be zero for the original purchaser. Thus the net proceeds of disposition are
taxed as a capital gain.
Options
Investors who have a low risk tolerance may trade in options to purchase or sell shares
rather than purchase the shares themselves.
Call Options
When an investor purchases a call option, he purchases the right to buy a certain number
of shares of the underlying corporation at a specified price (the strike price) within a
specified time frame. If the shares rise above the strike price, the investor will likely
exercise his options and buy the shares at the option price. The ACB of the shares bought
is the sum of the amount paid (the strike price times the number of shares purchased plus
brokerage fees) and the amount paid for the option. If the shares do not rise above the
option price (or for some other reason the options are not exercised), the options expire
they are deemed to have been disposed of for zero. The amount the investor paid for the
options is then a capital loss.
Example – Call Options: Exercise
Beth purchased a call contract for 100 shares of JKL Corp with a strike price of $50 per
share from Daniel for $500. The option expires after 90 days.
Beth watches the share price of JKL Corp and it rises above $50. Because she has
already invested $500 (or $5 per share), she continues to wait until the share price
exceeds $55.00). When the price hits $60 per share, Beth exercises her option and
purchases 100 shares from Daniel for $50 per share and immediately sells the share with
a brokerage fee of $60.
Beth’s ACB for the JKL Corp shares is 100 x $50.00 + $500 = $5,500. Her capital gain
on the transaction is $60 x 100 - $5,500 - $60 = $440. This represents a return on
investment of $440/$500 = 88%.
1.13
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Example – Call Options: Expired
Same situation as in the previous example, only this time, the price of JKL Corp shares
never reaches $55.00 per share so Beth never exercises the option and it expires after 90
days.
Beth has purchased an asset (the call options) and is deemed to have disposed of it for nil
proceeds when it expires. She has a capital loss equal to $500 – the amount she paid for
the shares.
Put options
Put options are similar to call options except that the buyer and seller are switched. The
purchaser of a put option pays for the right to sell a certain number of shares at a
specified price (the strike price) within a certain time period. If the value of the shares
goes below the strike price, the purchaser of the option will likely exercise the option
because they can get more than they would had they sold on the open market. In such
case, the proceeds of disposition are clearly the strike price and the ACB of the shares
sold is the ACB before the option plus the amount paid for the option. If the stock price
remains above the strike price, the buyer is unlikely to sell the shares as he could get
more by selling at market. The option is there likely to expire. In that case, the purchaser
has an asset (the put option) that is deemed disposed of for nil proceeds. The cost of the
option is then a capital loss.
Example – Put Options: Exercise
Aiden purchased a put contract for 100 shares of JKL Corp with a strike price of $50 per
share from Susan for $500. The option expires after 90 days.
Aiden had purchased the shares for $30 per share, they had risen to $50 but he is unsure
if they will continue to rise or will fall again. He watches the share price of JKL Corp
and it falls below $50. Because he has already invested $500 (or $5 per share), he
continues to wait until the share price falls below $45.00). When the price does no rise
above $45 and the put option is about to expire, Aiden exercises his option and sells 100
shares to Susan for $50 per share.
Aiden’s proceeds of disposition are 100 x $50 = $5,000. His ACB is $30 x 100 + $500.
1.14
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Example – Put Options: Expire
Same situation as in the previous example, only this time, the price of JKL Corp shares
never reaches $45.00 per share so Aiden never exercises the option and it expires after 90
days.
Aiden’s ACB for the JKL Corp shares is increased by the $500 he paid for the option to
$30 x 100 + $500.
Note the above discussion does not apply to employee stock options.
Real Property
Real property generally consists of two different types of assets: land and building.
When determining gains on real property it is necessary to determine the proceeds,
adjusted cost base and outlays and expenses separately for the land and for the buildings.
This is most often done on the basis of an appraisal.
Land is a capital asset and with few exceptions the adjusted cost base (ACB) is the
amount that the investor paid for the land. Buildings, on the other hand, are depreciable
assets. This means that the investor may claim a deduction for depreciation (called a
capital cost allowance) if the asset is held to earn income.
Here’s a quick summary of the rules for real estate and capital gains:
1. At the time of purchase the cost must be allocated to land and to depreciable
assets.
2. As additions are made or portions of the property are disposed of, the ACB and
UCC of the assets must be adjusted.
3. At the time of sale, proceeds must be allocated to land and to depreciable assets
(by class).
4. The disposition (or deemed disposition) of land my result in a capital gain or a
capital loss, depending on the proceeds and ACB.
5. The disposition (or deemed disposition) of depreciable assets my result in a
capital gain.
6. If the proceeds of disposition of depreciable assets are less than the cost of the
assets, there may be a terminal loss or recapture. There is never a capital loss on
the disposition of depreciable property.
1.15
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Bonds and Debentures
Most revenue from bonds and debentures come in the form of interest. However, if
bonds are sold prior to maturity, the sale may result in a capital gain or a capital loss.
Recall that interest that accrues is reported at least annually by the investor. When a
bond is sold the interest that has accrued to the seller (and on which tax may have already
been paid) but will be paid to the seller is considered to be part of the proceeds of
disposition. The actual proceeds must be reduced by the portion that is deemed to be
interest.
Personal-Use Property
Personal-use property is capital property that is not held to earn either investment income
or income from business. Everything a taxpayer owns that has a useful lifetime of more
than one year and is not held for investment or business purposes is personal-use
property. Most personal-use property seldom increased in value and therefore seldom
results in a capital gain. The most common exception to this rule is the taxpayer’s
principal residence. The special rules that apply to principal residences will be discussed
below. Those rare types of personal-use property that generally increase in value form a
special subset of personal-use property: listed personal property.
With the exception of the listed personal property, losses on personal-use property are not
allowed.
Principal Residence
Currently each family is allowed one tax-exempt principal residence. Briefly this means
that if a taxpayer owns and ordinarily inhabits a dwelling, then the gains on the sale of
that residence are exempt from taxation. The details of how this is accomplished and
what happens when the family owns more than one residence are discussed in the module
Planning for Residences.
Listed Personal Property
Listed personal property is a subset of personal-use property. It is defined as personaluse property that is a print, etching, drawing, painting, sculpture, or other similar work of
art, jewellery, a rare folio, rare manuscript or rare book, a stamp, or a coin. These
particular types of personal-use property are expected to increase in value over time. The
special rule that applies to listed personal property is that losses on listed personal
property are allowed, but may only be claimed to reduce gains on listed personal
property.
1.16
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Stock Splits
A stock split occurs when a corporation issues additional shares to shareholders in
proportion to the number of shares that they already own. This would generally happen
when the company determines that the current price of their stocks is too high. For
example, a two-for-one stock split would result in each shareholder owning twice the
number of shares that they owned before the split. In a reverse stock split, each
shareholder would have fewer shares after the reverse split. Stock splits to not change the
adjusted cost base of the shares owned, only the number of shares. Thus the ACB per
share is adjusted.
Try This Exercise #4: Stock Split
John purchased and sold shares of XYZ Corp several times as
follows:
Transaction
# shares
Cost/Proceeds
Purchase
1,000 shares
$4,590.00
Purchase
1,000 shares
$5,125.00
4,000 shares
$10,450.00
ACB
Split: 2 for 1
Sale
Determine the ACB or the shares owned after each of these
transactions. Look to the end of this module for the suggested
answers.
Capital Gains Election
As mentioned earlier, before 1972, capital gains were not taxed. The inclusion rate has
varied over the years from 50% to 75%. In 1985, a lifetime capital gains exemption of
$100,000 was introduced. That mean that the first $100,000 of capital gains that each
individual earned was not taxed. In 1994, that exemption was abolished but taxpayers
were given a one-time opportunity to claim that exemption on the accrued gains on any
assets they held at that time. This was accomplished by filing form T664 and electing a
1.17
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
new Adjusted Cost base which was an amount not exceeding the fair market value of the
asset at that time. The accrued gains were then added into income but were exempt
because of the capital gains exemption. For taxpayers who still own assets that they
owned in 1994, it is vital that the elected ACB be used in the determination of capital
gains when those assets are disposed of. If Form T664 was filed in 1994, a copy should
be maintained at filed with the individual’s will.
Try This Exercise #5: Capital Gains Election
Marnie purchased her home for $89,000 in 1990. She purchased a
cottage for $50,000 in 1992. In 1994 when the capital gains
exemption was eliminated, Marnie elected to include the accrued
gains on each in income. The elected value of the home was $98,000
and the cottage was $55,000.
When Marnie sells her home in 2012, assuming no other adjustments
to the cost base, what would the ACB of her home be?
If improvements to the cottage between 1995 and 2011 totalled
$28,000, what would the ACB of the cottage be in 2012?
Deemed Dispositions
In addition to actual sales of capital assets, there are several situations where the taxpayer
is deemed to have disposed of a capital asset and thus triggers a capital gain or a capital
loss. Some examples of deemed dispositions are:
•
of the taxpayer – all assets are deemed to be disposed of at their fair market value
at death,
•
Transfers to a trust or registered account – assets are deemed to have been
disposed of at their fair market value,
•
Emigration – assets are deemed to have been disposed of at their fair market value
on emigration,
•
Gifting – assets that are given away are deemed to have been disposed of at their
fair market value (special rules apply if the recipient is not dealt with at arm’s
length).
Reserve for Proceeds Not Due
When a capital property is sold, the proceeds are not always received in the same year as
the sale. As the capital gain is taxed in the year of disposition, this could cause a problem
1.18
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
if the amount of proceeds received is not sufficient to pay the tax on the gain. For this
reason, investors who sell a property may claim a reserve in the year of disposition so
that the taxes payable on proceeds not yet due are not taxed in the current year. The basic
formula for the reserve is
Proceeds not due until after the end of the year
Reserve = Capital Gain x
Total Proceeds
However, for most properties at least 20% of the gain must be included in income each
year and all of the gain must be reported within five years of the disposition.
1.19
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
IN SUMMARY: KEY CONCEPTS
1. When a capital property is disposed of, the increase in value is taxed as a capital
gain.
2. One half of capital gains are taxable capital gains.
3. Gains accrued prior to 1971 are not subject to taxation.
4. Gains on qualified small business corporation shares, qualified farm property and
qualified fishing property are eligible for the capital gains election which can
shelter up to $750,000 of such gains from taxation.
5. When a taxpayer owns identical properties, the adjusted cost base of the
properties sold is based on the average adjusted cost base of the properties.
6. Mutual fund units and segregated fund units are identical properties whose
income is allocated to the unit holders each year. This taxable income changes
the adjusted cost base of the units held if re-invested rather than being received.
7. When mutual funds are corporate class funds, it is possible for the investor to
transfer assets between funds with no income tax consequences.
8. Flow through shares allow the investor to claim the exploration and development
expenses passed on to them from the corporation. The ACB of such shares is
deemed to be zero
9. Options to purchase or sell stocks (puts and calls) are capital assets which may
result in capital gains or losses when they expire
10. When an investment is in real property, gains or losses must be allocated to
depreciable and non-depreciable portions of the property (buildings and land) as
losses on depreciable property are not capital losses.
11. Losses on personal use property are not capital losses.
12. Each family may own one principal residence which is exempt from taxation.
13. Listed personal property is a subset of personal use property on which losses are
allowed but only to reduce gains on listed personal property.
14. Stock splits do not change the ACB of the shares owned, but do change the
number of shares owned and therefore the ACB per share changes.
15. Taxpayers who owned capital assets in 1994 with accrued gains may have filed a
capital gains election to adjust the ACB of those properties.
16. Capital gains may arise on deemed dispositions as well as on real dispositions.
17. When proceeds are not all received in the year of sale, a reserve may be claimed.
1.20
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
TRY THIS EXERCISE ANSWERS
Try This Exercise #1
Transaction
Purchase
Purchase
Sale
Purchase
Sale
# shares
1,000 shares
1,000 shares
1,000 shares
2,000 shares
3,000 shares
Cost/Proceeds
$4,590.00
$5,125.00
$6,630.00
$5,124.00
$10,450.00
ACB
$4,590.00
$9,715.00
$4,857.50
$9,981.50
$0.00
Amount
$12,500.00
$245.00
$215.00
$13,257.45
ACB
$12,500.00
$12,745.00
$12,960.00
$0.00
10,000
Amount
$114,500.00
$21,541
$24,000
$24,547
$22,132
$121,457
ACB
$114,500.00
$114,500.00
$90,500.00
$90,500.00
$68,368.00
$0.00
# shares
1,000 shares
1,000 shares
Cost/Proceeds
$4,590.00
$5,125.00
4,000 shares
$10,450.00
ACB
$4,590.00
$9,715.00
$9,715.00
$0.00
Try This Exercise #2
Transaction
Purchase
Reinvest income
Reinvest income
Sale
Units
1,000
21.5
18.3
1,039.8
Try This Exercise #3
Transaction
Purchase
Capital gains
Return of capital
Capital gains
Return of capital
Sale
Units
10,000
Try This Exercise #4
Transaction
Purchase
Purchase
Split: 2 for 1
Sale
1.21
 T H E
K N O W L E D G E
B U R E A U
2 0 1 2
Try This Exercise #5
When Marnie sells her home in 2012, assuming no other adjustments to the cost base,
what would the ACB of her home be?
Answer: The elected amount $98,000.
If improvements to the cottage between 1995 and 2011 totalled $28,000, what would the
ACB of the cottage be in 2012?
Answer: The elected amount plus adjustments: $55,000 + $28,000 = $83,000.
NEXT STEPS
This completes the written portion of your course material.
Please return to your Student Resource Centre and take the CE Quiz for your certification
and accreditation.
1.22