MODULE 8 – CAPITAL GAINS/LOSSES – FUNDAMENTALS & INTEGRATION CAPITAL GAINS/LOSSES – FUNDAMENTALS
Text Coverage – Chapters 7 & 8 You are NOT responsible for the following paragraphs: 7,240 – 7,260.20 7,306 7,370 7,380 7,500 7,600 7,720 8,000 – 8,300 Change in use of a principal residence Special relief for tax-deferred elections made prior to March 4, 2010 Capital gains deferral Certain shares deemed to be capital property Death of a taxpayer Leaving and entering Canada Allowable business investment losses All of Chapter 8

Income for the year = (a) + (b) – (c) – (d) (a) Income from: + + + + Plus: (b) Net TCG for the year (cannot be negative) Taxable net gain from listed personal property (cannot be negative) Less: (c) Other deductions (except if deducted in (a) above) Less: (d) Losses for the year from an office, employment, business or property or ABIL Income for the year cannot be less than zero office, employment business property other income such other deductions as are deducted against this income.

Net TCG Revenue Expenses Income Division C Deductions Taxable income Proceeds of disposition (actual or deemed) Cost of disposition Cannot be negative for the year; apply inclusion rate of 50%; can be deferred (s.85, replacement property) CGD, Net CL carryover

Taxable Net Gain from LPP – the only place in the Act where losses of other years are deducted in the calculation of income as opposed to taxable income

Module 8 – Capital Gains/Losses
Personal – Division C and Tax Payable
Employment Business

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Property

Net TCG

Dividends - Indiv Cdn Eligible Inelig For'n

OI/OD TOTAL

Cdn For'n Cdn For'n Employment Business Property Net TCG OI/OD ABIL Div B Div C CGD (I) Net CL Non CL Stock Option Taxable Personal DTC FTC x x x x x x +/+/+/+/+/+ +

+

+ +/-

x

x x

Corporate – Division C and Tax Payable
Employment (PSB) Employment Business Property Net TCG OI/OD ABIL Div B Div C Donations Dividends Net CL Non CL Taxable Corporate Basic Abatement SBD M&P RDTOH FTC Gen ART Part IV 13% x 13% 6 2/3% 6 2/3% 6 2/3% 33 1/3% 38% 10% 38% 10% 17% 13% 26 2/3% 26 2/3% x 26 2/3% 33 1/3% x 38% 38% 10% 38% 10% 38% 10% 38% 38% 38% 38% 10% x x x x ? +/+/+/+/+/+ +/+ + + Business Cdn For'n Property Cdn For'n Conn Net TCG Dividends - Corp Cdn Port For'n TOTAL OI/OD

Module 8 – Capital Gains/Losses
Module 8 – Problem 1

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During the year Rachael had the following transactions in common shares of Carnegie Inc., a Canadian public company. She would like you, as her tax adviser, to explain the tax consequences to her of each of the following transactions:
Date Jan 15/13 Feb 20/13 Transaction Purchase Purchase Price / Number share of Shares $ 35 37 1,000 200 120 1,320 15 13 100 200 75 125 Broker Fees $ 700 150 1 2 Notes

April 5/13 Stock dividend - 10% Sept 16/13 Stock split Nov 30/13 Sold Dec 12/13 Purchase

Notes: 1. 2. 3. The April 5, 2013 stock dividend resulted in an increase in paid-up capital of $30 per share. The stock split gave Rachael 1 share for every share she held at the time. On December 15th she received a cash dividend of $10 per share.

Module 8 – Capital Gains/Losses
Module 8 – Problem 2

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Once again, you have just been asked for advice on employee stock options by two different clients. This is a continuation of problem Module 4-2. 1. Omer is part of the management team of a Canadian public company and is eligible for the employee stock option plan. A few years ago he received an option on 1,000 shares. The option required him to pay the option price of $30 (the value at the time the option was granted) for the shares at the time he exercises his option. Omer exercised the option three years ago when the shares were worth $35 and is now selling the shares for $45. He has asked you to tell him the amount of income he will have to report in 2013.

2.

Hilda is part of the management team of a Canadian-controlled private company and is eligible for the employee stock option plan. A few years ago she received an option on 1,000 shares. The option required her to pay the option price of $30 (the value at the time the option was granted) for the shares at the time she exercises her option. Hilda exercised the option three years ago when the shares were worth $35 and is now selling the shares for $45. She has asked you to tell her the amount of income she will have to report in 2013.

Module 8 – Capital Gains/Losses
Module 8 – Problem 3

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It’s now March 2013 and Ivy Jackson is confused so she has asked you for your advice. She invested $2,000 on April 1, 2012 in Growth Mutual Fund (GMF) which is sold by a major financial institution. Her investment purchased 72.788 units of the fund. On December 31, 2012 the fund allocated $96.37 of capital gains to her account. As a result, the $96.37 was reinvested in the fund to purchase 3.774 units at the market value of $25.535 per unit. She doesn’t understand what GMF reported to her in December and has asked you to explain it to her and see if they made a mistake. She is also thinking of selling 25 units at $28.72 per unit and wants to know how much tax she will have to pay, if any.

Module 8 – Capital Gains/Losses
Module 8 – Problem 4

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Mr. Norman, who lives in Ontario, is contemplating moving to British Columbia to retire. He came to you to discuss the tax consequences of disposing of both of his residences in April 2013. He is single and ordinarily inhabits both of the residences for several months each year. He has never used his principal residence exemption. The following information relates to the proposed 2013 dispositions. Date of purchase 2006 2008 Net Selling price $240,000 148,000

Residence Toronto home Condominium in Florida

Cost $160,000 100,000

Module 8 – Capital Gains/Losses
Module 8 – Problem 5

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As part of his move to British Columbia, Mr. Norman is also thinking of selling some of his personal assets and some of his investments. He would like you to tell him what the tax consequences will be for each of the following so he can decide whether to sell them or not.

Description Household furniture Paintings Car ABC shares (public co.)

Sale Proceeds $20,000 2,400 3,600 26,000

Cost $35,000 1,900 12,000 40,000

Disposition Costs $800 120 350 200

Module 8 – Capital Gains/Losses
Module 8 – Problem 6

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Donna has 1,000 shares in a Canadian public company that are worth $100,000 and that pay a dividend of $5,000 each year. Her adjusted cost base on these shares is $70,000. She is already in the top tax bracket. For estate planning purposes she is proposing the following options but she would like your advice as her personal tax planner before she makes a decision. Options considered: 1. 2. 3. Give the shares to her husband. Give the shares to her 15 year old daughter. Give the shares to her 25 year old daughter.

Module 8 – Capital Gains/Losses
Module 8 – Problem 7: Higgins

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Brad and Cathy are in to see you once again. They still haven’t finalized their financing of the building but they have another wrinkle to talk to you about. They have been living in Mississauga and are now planning to move to Kitchener, somewhere near the 401. Cathy wants to be closer to Gran Fondo without making the commute too difficult for Brad. They are going to put their Mississauga house on the market and expect to net $1,100,000 from the sale after commissions and legal fees. They remind you that Brad owns the house and Cathy owns the cottage. They will then buy a new house in Kitchener for $600,000 with the remaining $500,000 available to be invested in Gran Fondo. Cathy also has a question. She inherited her Gran Fondo shares from her father on his death and she isn’t sure what her cost base is on these shares. The Gran Fondo balance sheet shows share capital of $1,000 for the 1,000 common shares issued. When her father died she remembers something about the fair market value at that time being $400,000. They would like your advice. Identify Research Decide

Module 8 – Capital Gains/Losses
Module 8 – Problem 8: Higgins

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Brad also wants some help with some of his investment transactions. He recently sold the 5,000 shares of GTA Mobile Inc. he acquired under the employee stock option he was granted three years ago. He received proceeds of $40 per share. A while ago he purchased an option on the open market to acquire shares of PubCo Inc. He paid $3,000 for the option to buy 1,000 shares at $22/share. The option is about to expire and since the shares are now trading at $26/share he is going to exercise the option. He then plans to sell immediately. He is currently holding some shares that have declined in value. He wants to continue to hold the shares, since he thinks they still have potential, but he would like to realize the loss now to offset some gains he realized this year. Can he sell them and repurchase them immediately, or have Cathy repurchase them, to trigger the loss without giving up the future potential? Brad loves old cars, especially ones he can fix up. He recently saw an opportunity to buy an old MGA but Cathy has said that if he wants to buy it he has to sell the one he already has. While he doesn’t want to part with his current antique car he has agree with her. He has received an offer of $25,000 for the car. Originally it cost him $5,000 and he spent another $15,000 to restore it, excluding his own time. This is a hobby of his, not a business, so he is hoping there won’t be any tax. Identify Research Decide