Capital Gains – 2013

T4037(E) Rev. 13

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Table of contents

Before you start

Is this guide for you?

We explain the most common income tax situations in this guide. Use this guide to get information on capital gains or capital losses in 2013. You generally have a capital gain or loss whenever you sell, or are considered to have sold, capital property. The term "Capital property" is defined in the Definitions. Use Schedule 3, Capital Gains (or Losses) in 2013, to calculate and report your taxable capital gains or net capital loss.

If your only capital gains or losses are those shown on information slips (T3, T4PS, T5, or T5013), and you did not file Form T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994 , you do not have to read the entire guide. See Chart 1 - Reporting capital gains (or losses) and other amounts from information slips to find out how to report these amounts.

If you sell units, shares, or securities for which you were issued an information slip, you will have to report a capital gain or loss. See Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares.

If you are a farmer and you sold eligible capital property that is qualified farm property or farmland in 2013 that includes your principal residence, see Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide , or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide. Guide RC4060 is applicable to AgriStability and AgriInvest Program participants in Ontario, Alberta, Saskatchewan, and Prince Edward Island while Guide RC4408 applies to AgriStability and AgriInvest participants in all other provinces and the Yukon.

If you are a non-resident, emigrant, or new resident of Canada, you should refer to the guide that applies to your situation:

What's new for 2013 and 2014?

Restricted farm loss deduction limit – For tax years ending after March 20, 2013, the restricted farm loss deduction limit may increase. For more information, see Restricted farm loss.

Lifetime capital gains exemption limit – For dispositions after 2013 of qualified small business corporation shares and qualified farm and fishing property, the lifetime capital gains exemption limit has increased to $800,000. The new limit is indexed to inflation, and the first indexation adjustment will occur for the 2015 tax year.

Definitions

This section describes, in a general way, technical terms that we use in this guide. Whenever practical, we define technical terms in detail in the applicable chapters.

Note

Throughout this guide, we use the terms sell, sold, buy, and bought to describe most capital transactions. However, the information in this guide also applies to other dispositions or acquisitions, such as when you give or receive a gift. When reading this guide, you can substitute the terms disposed of or acquired for sold or bought, if they more accurately describe your situation.

Abbreviations - The following is a list of some of the abbreviations that we use in this guide:

ABIL – Allowable business investment loss
ACB – Adjusted cost base
CCA – Capital cost allowance
CNIL – Cumulative net investment loss
FMV – Fair market value
LPP – Listed personal property
RFL – Restricted farm loss
UCC – Undepreciated capital cost

Adjusted cost base (ACB) – usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees.

The cost of a capital property is its actual or deemed cost, depending on the type of property and how you acquired it. It also includes capital expenditures, such as the cost of additions and improvements to the property. You cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

For more information on ACB, see Interpretation Bulletin IT-456, Capital Property – Some Adjustments to Cost Base, and its Special Release.

Advantage – see the definition of Eligible amount of the gift.

Allowable capital loss – is your capital loss for the year multiplied by the inclusion rate for that year. For 2001 and subsequent years, the inclusion rate is 1/2.

Arm's length transaction – This is a transaction between persons who act in their separate interests. Related persons are not considered to be dealing with each other at arm's length. Related persons include individuals connected by a blood relationship, marriage or common-law partnership, or adoption (legal or in fact). A corporation and an individual, or two corporations, may also be related persons.

Unrelated persons might not be dealing with each other at arm's length at a particular time if, for example, one person is under the influence or control of the other, or the persons are considered to be acting together. Each case depends upon its own facts.

For more information on arm's length, see Interpretation Bulletin IT-419, Meaning of Arm's Length.

Business investment loss – see Allowable business investment loss.

Canadian-controlled private corporation – is a private corporation that is a Canadian corporation other than:

  • a corporation controlled, directly or indirectly in any way, by one or more non-resident persons, by one or more public corporations (other than a prescribed venture capital corporation), by one or more corporations described in paragraph c), or by any combination of the above;
  • a corporation that would be controlled by one person if that one person owned all the shares of any corporation that are owned by any non-resident person, by any public corporation (other than a prescribed venture capital corporation), or by a corporation described in paragraph c); or
  • a corporation, a class of the shares of capital stock of which is listed on a designated stock exchange.

Canadian security is:

  • a share of the capital stock of a corporation resident in Canada;
  • a unit of a mutual fund trust; or
  • a bond, debenture, bill, note, mortgage, hypothecary claim, or similar obligation issued by a person resident in Canada.

Prescribed securities are not considered to be Canadian securities.

Capital cost allowance (CCA) – in the year you buy a depreciable property, such as a building, you cannot deduct its full cost. However, since this type of property wears out or becomes obsolete over time, you can deduct its capital cost over a period of several years. This deduction is called CCA. When we talk about CCA, a reference is often made to class. You usually group depreciable properties into classes. You have to base your CCA claim on the rate assigned to each class of property.

Capital gain – you have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Capital loss – you have a capital loss when you sell, or are considered to have sold, a capital property for less than the total of its adjusted cost base and the outlays and expenses incurred to sell the property.

Capital property – includes depreciable property, and any property which, if sold, would result in a capital gain or a capital loss. You usually buy it for investment purposes or to earn income. Capital property does not include the trading assets of a business, such as inventory. Some common types of capital property include:

  • cottages;
  • securities, such as stocks, bonds, and units of a mutual fund trust; and
  • land, buildings, and equipment you use in a business or a rental operation.

Common-law partner – this applies to a person who is not your spouse, with whom you are living and have a conjugal relationship, and to whom at least one of the following situations applies. He or she:

  • has been living with you in a conjugal relationship, and this current relationship has lasted at least 12 continuous months;
    Note
    In this definition, "12 continuous months" includes any period you were living separate and apart for less than 90 days because of a breakdown in the relationship.

  • is the parent of your child by birth or adoption; or

  • has custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support.

Deemed acquisition – expression used when you are considered to have acquired property, even though you did not actually buy it.

Deemed cost – refers to the price of property you are considered to have acquired, even though you did not actually buy it.

Deemed disposition – expression used when you are considered to have disposed of property, even though you did not actually sell it.

Deemed proceeds of disposition – expression used when you are considered to have received an amount for the disposition of property, even though you did not actually receive the amount.

Depreciable property – usually capital property used to earn income from a business or property. The capital cost can be written off as CCA over a number of years.

Disposition (dispose of) – usually an event or transaction where you give up possession, control, and all other aspects of property ownership.

Eligible amount of the gift – this is generally the amount by which the fair market value (FMV) of the gifted property exceeds the amount of an advantage, if any, received or receivable in the future for the gift. For more information, see Pamphlet P113, Gifts and Income Tax.

The advantage is generally the total value of any property, service, compensation, use or any other benefit that you are entitled to as partial consideration for, or in gratitude for, the gift. The advantage may be contingent or receivable in the future, either to you or a person or partnership not dealing at arm's length with you.

The advantage also includes any limited-recourse debt in respect of the gift at the time it was made. For example, there may be a limited-recourse debt if the property was acquired through a tax shelter that is a gifting arrangement. In this case, the eligible amount of the gift will be reported in box 13 of Form T5003, Statement of Tax Shelter Information. For more information on gifting arrangements and tax shelters, see guide T4068, Guide for the Partnership Information Return (T5013 Forms).

Eligible active business corporation – generally, this is a taxable Canadian corporation, where all or substantially all of the fair market value (FMV) of its assets are used principally in an active business carried on primarily in Canada by the corporation or by a related active business corporation while the investor holds the shares, or for at least 730 days of the ownership period. It can also be shares of, and/or a debt issued by, other related active business corporations or a combination of such assets, shares, or debt.

Note

An eligible active business corporation does not include:

  • a professional corporation;
  • a specified financial institution;
  • a corporation whose principal business is leasing, renting, developing, or selling real property that it owns or any combination of these activities; and
  • a corporation where more than 50% of the FMV of its property (net of debts incurred to acquire the property) is attributable to real property.

Eligible capital property – property that does not physically exist but gives you a lasting economic benefit. Examples of this kind of property are goodwill, customer lists, trademarks, and milk quotas.

Eligible small business corporation – generally, this is a Canadian-controlled private corporation, where all or substantially all of the FMV of its assets are used principally in an active business that is carried on primarily in Canada by the corporation or an eligible small business corporation related to it. It can also be shares of, and/or a debt issued by, other related eligible small business corporations or a combination of such assets, shares, or debt. The issuing corporation must be an eligible small business corporation at the time the shares were issued.

Note

An eligible small business corporation does not include:

  • a professional corporation;
  • a specified financial institution;
  • a corporation whose principal business is leasing, renting, developing, or selling real property that it owns or any combination of these activities; and
  • a corporation where more than 50% of the FMV of its property (net of debts incurred to acquire the property) is attributable to real property.

Excepted gift – a gift of a share you made to a donee with whom you deal at arm's length. The donee cannot be a private foundation. If the donee is a charitable organization or public foundation, it will be an excepted gift if you deal at arm's length with each director, trustee, officer, and official of the donee. For more information, see Non-qualifying security.

Fair market value (FMV) – is usually the highest dollar value you can get for your property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.

Flow-through entity – we explain this term in What is a flow-through entity?

Inclusion rate - generally, the inclusion rate for 2013 is 1/2. This means that you multiply your capital gain for the year by this rate to determine your taxable capital gain. Similarly, you multiply your capital loss for the year by 1/2 to determine your allowable capital loss. For a list of previous year inclusion rates, see Inclusion rate.

Listed personal property (LPP) – is a type of personal-use property. The principal difference between LPP and other personal-use properties is that LPP usually increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

  • prints, etchings, drawings, paintings, sculptures, or other similar works of art;
  • jewellery;
  • rare folios, rare manuscripts, or rare books;
  • stamps; and
  • coins.

Net capital loss – generally, if your allowable capital losses are more than your taxable capital gains, the difference between the two becomes part of the calculation of your net capital loss for the year.

Non-arm's length transaction – a transaction between persons who were not dealing with each other at arm's length at the time of the transaction.

Non-qualifying real property – generally, non-qualifying real property is real property that you or your partnership disposed of after February 1992 and before 1996.

It also generally includes the following property you or your partnership disposed of after February 1992 and before 1996, if its fair market value is derived principally (more than 50%) from real property:

  • a share of a capital stock of a corporation;
  • an interest in a partnership;
  • an interest in a trust; or
  • an interest or an option in any property described above.

Non-qualifying securities – are securities you donated to a qualified donee. Non-qualifying securities generally include:

  • a share of a corporation with which you do not deal at arm's length after the donation was made;
  • your beneficial interest in a trust in certain circumstances;
  • an obligation of yours or of any person or partnership with whom you do not deal at arm's length after the donation was made; or
  • any other security issued by you or by any person or partnership with whom you do not deal at arm's length after the donation was made.

Non-qualifying securities exclude:

  • shares, obligations, and other securities listed on a designated stock exchange; and
  • obligations of a financial institution to repay an amount deposited with the institution.

For more information on non-qualifying securities, go to Non-qualifying security.

Outlays and expenses – are amounts that you incurred to sell a capital property. You can deduct outlays and expenses from your proceeds of disposition when calculating your capital gain or loss. You cannot reduce your other income by claiming a deduction for these outlays and expenses. These types of expenses include fixing-up expenses, finders' fees, commissions, brokers' fees, surveyors' fees, legal fees, transfer taxes, and advertising costs.

Personal-use property – refers to items that you own primarily for the personal use or enjoyment of your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties.

Prescribed security – generally includes:

  • a share of a corporation (other than a public corporation) whose value at the time you dispose of it comes mainly from real estate, resource properties, or both;
  • a bond, debenture, bill, note, mortgage, or similar obligation of a corporation (other than a public corporation) that you do not deal with at arm's length at any time before you dispose of the security; and
  • a share, bond, debenture, bill, note, mortgage, or similar obligation you acquire from a person with whom you do not deal at arm's length.

A prescribed security is not considered to be a Canadian security.

Proceeds of disposition – usually the amount you received or will receive for your property. In most cases, it refers to the sale price of the property. This could also include compensation you received for property that has been destroyed, expropriated, or stolen.

Public corporation – is a corporation that is resident in Canada and:

  • has a class of shares listed on a designated Canadian stock exchange; or
  • is a corporation (other than a prescribed labour-sponsored venture capital corporation) that has elected, or has been designated by the Minister of National Revenue, to be a public corporation. Also, at the time of the election or designation, the corporation complied with prescribed conditions concerning the number of its shareholders, the dispersal of ownership of its shares, and the public trading of its shares.

Qualified donees – are as follows:

  • registered charities;
  • registered Canadian amateur athletic associations
  • registered national arts service organizations;
  • listed housing corporations in Canada set up only to provide low cost housing for the aged;
  • listed municipalities in Canada;
  • listed municipal or public bodies performing a function of government in Canada;
  • the United Nations and its agencies;
  • listed universities outside Canada with a student body that ordinarily includes students from Canada provided these universities are listed in Schedule VIII of the Income Tax Regulations;
  • the Government of Canada, a province, or a territory; and
  • listed foreign charitable organizations to which Her Majesty in right of Canada has made a gift and that have been registered.

Qualified farm property – is certain property you or your spouse or common-law partner owns. It is also certain property owned by a family-farm partnership in which you or your spouse or common-law partner holds an interest.

Qualified farm property includes:

  • a share of the capital stock of a family-farm corporation that you or your spouse or common-law partner owns;
  • an interest in a family-farm partnership that you or your spouse or common-law partner owns;
  • real property, such as land and buildings; and
  • eligible capital property, such as milk and egg quotas.

For more information on what is considered to be qualified farm property, see Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide, or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.

Qualified fishing property – is certain property you or your spouse or common-law partner owns. It is also certain property owned by a family fishing partnership in which you or your spouse or common-law partner holds an interest.

Qualified fishing property includes:

  • a share of the capital stock of a family fishing corporation that you or your spouse or common-law partner owns;
  • an interest in a family fishing partnership that you or your spouse or common-law partner owns;
  • real property, such as land and fishing vessels; and
  • eligible capital property, such as fishing licences.

For more information on what is considered to be qualified fishing property, see Guide T4004, Fishing Income.

Qualified small business corporation shares – a share of a corporation will be considered to be a qualified small business corporation share if all the following conditions are met:

  • at the time of sale, it was a share of the capital stock of a small business corporation, and it was owned by you, your spouse or common-law partner, or a partnership of which you were a member;
  • throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by you, a partnership of which you were a member, or a person related to you, it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets of the corporation were:
    • used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation;
    • certain shares or debts of connected corporations; or
    • a combination of these two types of assets; and
  • throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, a partnership of which you were a member, or a person related to you.

Generally, when a corporation has issued shares after June 13, 1988, either to you, to a partnership of which you are a member, or to a person related to you, a special situation exists. We consider that, immediately before the shares were issued, an unrelated person owned them. As a result, to meet the holding-period requirement, the shares cannot have been owned by any person other than you, a partnership of which you are a member, or a person related to you for a 24-month period that begins after the shares were issued and that ends when you sold them. However, this rule does not apply to shares issued:

  • as payment for other shares;
  • for dispositions of shares after June 17, 1987, as payment of a stock dividend; or
  • in connection with a property that you, a partnership of which you were a member, or a person related to you disposed of to the corporation that issued the shares. The property disposed of must have consisted of either:
    • all or most (90% or more) of the assets used in an active business carried on either by you, the members of the partnership of which you were a member, or the person related to you; or
    • an interest in a partnership where all or most (90% or more) of the partnership's assets were used in an active business carried on by the members of the partnership.

Real property – property that cannot be moved, such as land or buildings. We commonly refer to such property as "real estate".

Recapture – when you sell a depreciable property for less than its capital cost, but for more than the undepreciated capital cost (UCC) in its class, you do not have a capital gain. However, if there is a negative UCC balance at the end of the year, this balance is a recapture of capital cost allowance. You have to include this amount in income for that year.

Small business corporation – is a Canadian-controlled private corporation in which all or most (90% or more) of the fair market value of its assets:

  • are used mainly in an active business carried on primarily in Canada by the corporation or by a related corporation;
  • are shares or debts of connected corporations that were small business corporations; or
  • are a combination of these two types of assets.

Spouse – applies only to a person to whom you are legally married.

Taxable capital gain – is the portion of your capital gain that you have to report as income on your income tax and benefit return.

If you realize a capital gain when you donate certain properties to a qualified donee or make a donation of ecologically sensitive land, special rules will apply. For more information, see Calculating your capital gain or loss and Capital gains deferral for investment in small business.

Terminal loss – occurs when you have an undepreciated balance in a class of depreciable property at the end of the tax year or fiscal year, and you no longer own any property in that class. You can deduct the terminal loss when you calculate your income for the year. For more information on terminal losses, see Recapture of CCA and terminal losses.

Undepreciated capital cost (UCC) – generally, UCC is equal to the total capital cost of all the properties of the class minus the capital cost allowance you claimed in previous years. If you sell depreciable property in a year, you also have to subtract from the UCC one of the following two amounts, whichever is less:

  • the proceeds of disposition of the property (either actual or deemed) minus the outlays and expenses incurred to sell it; or
  • the capital cost of the property.

Chapter 1 – General information

This chapter provides the general information you need to report a capital gain or loss.

Generally, when you dispose of a property and end up with a gain or a loss, it may be treated in one of two ways:

  • as a capital gain or loss (capital transaction); or
  • as an income gain or loss (income transaction).

When you dispose of a property, you need to determine if the transaction is a capital transaction or an income transaction. The facts surrounding the transaction determine the nature of the gain or loss.

For more information on the difference between capital and income transactions, see the following Interpretation Bulletins:

IT-218 Profits, capital gains and losses from the sale of real estate, including farmland and inherited land and conversion of real estate from capital property to inventory and vice versa;

IT-459 Adventure or concern in the nature of trade; and

IT-479 Transactions in securities, and its Special Release.

For information on how to report income transactions, see Guide T4002, Business and Professional Income.

When do you have a capital gain or loss?

Usually, you have a capital gain or loss when you sell or are considered to have sold capital property. The following are examples of cases where you are considered to have sold capital property:

  • You exchange one property for another.
  • You give property (other than cash) as a gift.
  • Shares or other securities in your name are converted.
  • You settle or cancel a debt owed to you.
  • You transfer certain property to a trust.
  • Your property is expropriated.
  • Your property is stolen.
  • Your property is destroyed.
  • An option that you hold to buy or sell property expires.
  • A corporation redeems or cancels shares or other securities that you hold (you will usually be considered to have received a dividend, the amount of which will be shown on a T5 slip).
  • You change all or part of the property's use (see Changes in use).
  • You leave Canada (see Guide T4056, Emigrants and Income Tax).
  • The owner dies (see Guide T4011, Preparing Returns for Deceased Persons).

Disposing of Canadian securities

If you dispose of Canadian securities, it's possible that you could have a gain or loss on income account (as opposed to the more likely capital gain or loss). However, in the year you dispose of Canadian securities, you can elect to report such a gain or loss as a capital gain or loss. If you make this election for a tax year, we will consider every Canadian security you owned in that year and later years to be capital properties. A trader or dealer in securities (other than a mutual fund trust or a mutual fund corporation) or anyone who was a non-resident of Canada when the security was sold cannot make this election.

If a partnership owns Canadian securities, each partner is treated as owning the security. When the partnership disposes of the security, each partner can elect to treat the security as capital property. An election by one partner will not result in each partner being treated as having made the election.

To make this election, complete Form T123, Election on Disposition of Canadian Securities, and attach it to your 2013 income tax and benefit return. Once you make this election, you cannot reverse your decision.

For more information on this election as well as what constitutes a gain on income account versus a capital gain, see Interpretation Bulletin IT-479, Transactions in securities, and its Special Release.

Disposing of personal-use property (including your principal residence)

Most people are not affected by the capital gains rules because the property they own is for their personal use or enjoyment.

Personal-use property

When you sell personal-use property, such as cars and boats, in most cases you do not end up with a capital gain. This is because this type of property usually does not increase in value over the years. As a result, you may end up with a loss. Although you have to report any gain on the sale of personal-use property, generally you are not allowed to claim a loss. For more information, see Personal-use property.

Principal residence

If you sell your home for more than what it cost you, you usually do not have to report the sale on your income tax and benefit return or pay tax on any gain as long as:

  • your home is your principal residence; and
  • you or a member of your family did not designate any other property as a principal residence while you owned your home. For more information, see Principal residence.

When do you report a capital gain or loss?

Report the disposition of capital property in the calendar year (January to December) you sell, or are considered to have sold, the property.

Note

Regardless of whether or not the sale of a capital property results in a capital gain or loss, you have to file an income tax and benefit return to report the transaction (even if you do not have to pay tax). This rule also applies when you report the taxable part of any capital gains reserve you deducted in 2012.

Do you own a business?

If you own a business that has a fiscal year end other than December 31, you still report the sale of a capital property in the calendar year the sale takes place.

Example

Pauline owns a small business. The fiscal year end for her business is June 30, 2013. In August 2013, she sold a capital property that she used in her business. As a result of the sale, she had a capital gain. Pauline has to report the capital gain on her income tax and benefit return for 2013. She does this even though the sale took place after her business's fiscal year end date of June 30.

Are you a member of a partnership?

If you are a member of a partnership, it is possible that your partnership has a fiscal year end other than December 31. If the partnership sells capital property during its fiscal year, you generally report your share of any capital gain or loss in the calendar year in which that fiscal year ends.

Calculating your capital gain or loss

To calculate any capital gain or loss, you need to know the following three amounts:

  • the proceeds of disposition;
  • the adjusted cost base (ACB); and
  • the outlays and expenses incurred to sell your property.

To calculate your capital gain or loss, subtract the total of your property's ACB, and any outlays and expenses incurred to sell your property, from the proceeds of disposition.

You have a capital gain when you sell, or are considered to have sold, a capital property for more than the total of its ACB and the outlays and expenses incurred to sell the property.

Example

In 2013, Mario sold 400 shares of XYZ Public Corporation of Canada for $6,500. He received the full proceeds at the time of the sale and paid a commission of $60. The ACB of the shares is $4,000. Mario calculates his capital gain as follows:

Proceeds of disposition $ 6,500 A
Adjusted cost base $ 4,000 B
Outlays and expenses on disposition + 60 C
Line B plus line C = $ 4,060 Arrow: transfer result to the right column 4,060 D
Capital gain (line A minus line D) = $ 2,440 E

Because only 1/2 of the capital gain is taxable, Mario completes Schedule 3 and reports $1,220 as his taxable capital gain on line 127 of his income tax and benefit return.

When you sell, or are considered to have sold, a capital property for less than its ACB plus the outlays and expenses incurred to sell the property, you have a capital loss. You can apply 1/2 of your capital losses against any taxable capital gains in the year. For more information on capital losses, see Chapter 5.

Use Schedule 3, Capital Gains (or Losses) in 2013, to calculate and report all your capital gains and losses. Do not include any capital gains or losses in your business or property income, even if you used the property for your business. For more information on how to complete Schedule 3, see Chapter 2.

You may be entitled to an inclusion rate of zero on any capital gain resulting from the donation of any of the following properties to a qualified donee :

  • a share of the capital stock of a mutual fund corporation;
  • a unit of a mutual fund trust;
  • an interest in a related segregated fund trust;
  • a prescribed debt obligation;
  • ecologically sensitive land (including a covenant, an easement, or in the case of land in Quebec, a real servitude) donated to certain qualified donees other than a private foundation where conditions are met; and
  • a share, debt obligation, or right listed on a designated stock exchange.

    For donations of publicly traded securities, the inclusion rate of zero has been extended to any capital gain realized on the exchange of shares of the capital stock of a corporation for those publicly listed securities donated. This treatment is subject to certain conditions. In cases where the exchanged securities are partnership interests, a special calculation is required to determine the capital gain to be reported. For more information on exchangeable securities, see Pamphlet P113, Gifts and Income Tax.

Generally, if you donate property to a qualified donee after March 21, 2011, that is at the time of the donation included in a “flow-through share class of property”, in addition to any capital gain that would otherwise be subject to the zero inclusion rate discussed earlier in this section, you may be deemed to have a capital gain from the disposition of another capital property. For more information including the calculation of the capital gain, see Pamphlet P113.

If you donated any of these properties, use Form T1170, Capital Gains on Gifts of Certain Capital Property to calculate the capital gain to report on Schedule 3.

Even though, in most cases, the inclusion rate of 1/2 is reduced to zero for gifts of these properties, Form T1170 should still be completed to report these gifts.

However, in all cases, if you received an advantage in respect of the gift, part of the capital gain on the gifted property will be subject to the 1/2 inclusion rate. In addition, the inclusion rate of zero does not apply to capital losses you may have from such donations. For more information, see Pamphlet P113, Gifts and Income Tax.

Note

Before 1972, capital gains were not taxed. Therefore, if you sold capital property in 2013 that you owned before 1972, you have to apply special rules when you calculate your capital gain or loss to remove any capital gains accrued before 1972. We do not explain these rules in this guide. To calculate your gain or loss from selling property you owned before 1972, use Form T1105, Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972.

What happens if you have a capital gain?

If you have a capital gain, you may be able to:

  • defer part of the capital gain by claiming a reserve (see the next section); or
  • reduce or offset all or a part of the gain by claiming a capital gains deduction (see Claiming a capital gains deduction).

Claiming a reserve

When you sell a capital property, you usually receive full payment at that time. However, sometimes you receive the amount over a number of years. For example, you sell a capital property for $50,000 and receive $10,000 when you sell it and the remaining $40,000 over the next four years. If this happens, you may be able to claim a reserve. Usually, a reserve allows you to report a portion of the capital gain in the year you receive the proceeds of disposition.

Who can claim a reserve?

Most people can claim a reserve when they dispose of a capital property. Generally, you cannot claim a reserve in a tax year if you:

  • were not a resident of Canada at the end of the tax year, or at any time in the following year;
  • were exempt from paying tax at the end of the tax year, or at any time in the following year; or
  • sold the capital property to a corporation that you control in any way.

How do you calculate and report a reserve?

If you claim a reserve, you still calculate your capital gain for the year as the proceeds of disposition minus the adjusted cost base and the outlays and expenses incurred to sell the property. From this, you deduct the amount of your reserve for the year. What you end up with is the part of the capital gain that you have to report in the year of disposition.

To deduct a reserve in any year, you have to complete Form T2017, Summary of Reserves on Dispositions of Capital Property. The information on the back of Form T2017 explains how to calculate the maximum amount you can deduct as a reserve for a given year and the number of years for which you can claim the reserve.

Generally, the maximum period over which most reserves can be claimed is 5 years. However, a 10 year reserve period is provided for transfers to your child of family farm property, family fishing property, and small business corporation shares, as well as gifts of non-qualifying securities made to a qualified donee. See Form T2017 for more information.

If you claimed a reserve in the previous year, include that reserve in the calculation of your capital gains for the current year. For example, if you claimed a reserve in 2012, you have to include it in your capital gains calculation for 2013. Claim the new reserve that you have calculated for 2013 in the appropriate area on Form T2017. If you still have an amount that is payable to you after 2013, you may be able to calculate and claim a new reserve. However, you will have to include it in your capital gains calculation for 2014.

A capital gain from a reserve brought into income qualifies for the capital gains deduction only if the original capital gain was from a property eligible for the deduction. For a list of these properties, see Which capital gains are eligible for the capital gains deduction?

Note

You do not have to claim the maximum reserve in a tax year (Year A). However, the amount you claim in a later year (Year B) cannot be more than the amount you claimed for that property in the previous year (Year A).

Reserve for a gift of non-qualifying securities

If you donate a non-qualifying security (other than an excepted gift) to a qualified donee and have a capital gain, you may be able to claim a reserve in order to postpone the inclusion of the capital gain in income. For the definitions of excepted gift, non-qualifying securities, and qualified donee see Definitions.

For gifts of non-qualifying securities made after December 20, 2002, the reserve you can claim cannot be greater than the eligible amount of the gift.

You can claim this reserve for any tax year ending within 60 months of the time you donated the security. However, you cannot claim a reserve if the donee disposes of the security, or if the security ceases to be a non-qualifying security before the end of the tax year. If this happens, you will be considered to have made a charitable donation in that year, and you can claim the charitable donation tax credit.

Where a qualified donee has received a gift of a non-qualifying security (other than an excepted gift), no tax receipt may be issued and therefore no charitable donation tax credit may be claimed by the donor unless, within the 60-month period, the non-qualifying security ceases to be a non-qualifying security or has been disposed of in exchange for property that is not another non-qualifying security of the donor. For dispositions of non-qualifying securities by qualified donees after March 21, 2011, the disposition must be in exchange for property that is not another non-qualifying security of any party.

If the security is not disposed of within the 60-month period, you will not be required to bring the reserve back into income in the year following the end of that period.

To deduct this type of reserve, you have to complete Form T2017, Summary of Reserves on Dispositions of Capital Property.

Claiming a capital gains deduction

If you have a capital gain on the sale of certain properties, you may be eligible for the $375,000 lifetime capital gains deduction [1/2 of the $750,000 lifetime capital gains exemption (LCGE)].

The deduction limit was increased to $375,000 on capital gains arising from dispositions of qualified property after March 18, 2007.

What is a capital gains deduction?

It is a deduction that you can claim against taxable capital gains you realized from the disposition of certain capital properties. You can reduce your taxable income by claiming this deduction.

Which capital gains are eligible for the capital gains deduction?

You may be able to claim the capital gains deduction on taxable capital gains you have in 2013 from:

  • dispositions of qualified small business corporation shares;
  • dispositions of qualified farm property;
  • dispositions, after May 1, 2006, of qualified fishing property; and
  • a reserve brought into income in 2013, from any of the above.
Note

Any capital gains from the disposition of these properties while you were a non-resident of Canada are not eligible for the capital gains deduction unless you meet the requirements explained in the next section.

You will find the definitions of qualified farm property, qualified fishing property, and qualified small business corporation shares in Definitions.

Who is eligible to claim the capital gains deduction?

You have to be a resident of Canada throughout 2013 to be eligible to claim the capital gains deduction. For the purposes of this deduction, we will also consider you to be a resident throughout 2013 if:

  • you were a resident of Canada for at least part of 2013; and
  • you were a resident of Canada throughout 2012 or 2014.

Residents of Canada include factual and deemed residents. For more information on factual and deemed residents, see Before you start in the General Income Tax and Benefit Guide, or see Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status.

What is the capital gains deduction limit?

For 2013, if you disposed of qualified small business corporation shares, qualified farm property, or qualified fishing property, you may be eligible for the $750,000 LCGE. Because you only include one-half of the capital gains from these properties in your taxable income, your cumulative capital gains deduction is $375,000 (1/2 of $750,000).

The total of your capital gains deductions on dispositions from 1985 to March 18, 2007, for all types of capital properties could not be more than your cumulative lifetime deduction of $250,000.

The capital gains deduction limit on gains arising from dispositions after March 18, 2007, increased by $125,000 to $375,000 (1/2 of the current LCGE of $750,000).

How do you claim the capital gains deduction?

Use Form T657, Calculation of Capital Gains Deduction for 2013, to calculate the capital gains deduction. If you have investment income or investment expenses in any years from 1988 to 2013, you will also have to complete Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2013.

Tax Tip
You can claim any amount of the capital gains deduction you want to in a year, up to the maximum allowable amount you calculated.

What happens if you have a capital loss?

If you have a capital loss in 2013, you can use it to reduce any capital gains you had in the year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year. Generally, you can apply your net capital losses to taxable capital gains of the three preceding years and to taxable capital gains of any future years. For more information on capital losses, see Chapter 5.

What records do you have to keep?

You will need information from your records or vouchers to calculate your capital gains or capital losses for the year. You do not need to include these documents with your income tax and benefit return as proof of any sale or purchase of capital property. However, it is important that you keep these documents in case we ask to see them later.

If you own qualified farm property, qualified fishing property or qualified small business corporation shares, you should also keep a record of your investment income and expenses in case you decide to claim a capital gains deduction in the year of sale. You will need these amounts to calculate the cumulative net investment loss (CNIL) component of the capital gains deduction. You can use Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2013, for this purpose.

In addition, you should keep a record of the fair market value of the property on the date you:

  • inherit it;
  • receive it as a gift; or
  • change its use.

Chapter 2 – Completing Schedule 3

This chapter gives you information about how and where you should report some of the more common capital transactions on Schedule 3, Capital Gains (or Losses) in 2013. Schedule 3 is included in the General income tax package.

Schedule 3 has five numbered columns and is divided into several sections for reporting the disposition of different types of properties. Report each disposition in the appropriate section and make sure you provide the information requested in all columns. Complete the bottom portion of the schedule to determine your taxable capital gain or your net capital loss. If you have a taxable capital gain, transfer the amount to line 127 of your income tax and benefit return. If you have a net capital loss, see Chapter 5 for information on how you can apply the loss.

Note

You may need to refer to Definitions for the definition of certain terms used in this chapter.

Qualified small business corporation shares

Report dispositions of qualified small business corporation shares on lines 106 and 107 of Schedule 3. See the definition of qualified small business corporation shares in Definitions.

Note

Do not report the following transactions in this section of Schedule 3:

  • the sale of other shares, such as publicly traded shares or shares of a foreign corporation;
  • your losses when you sell any shares of small business corporations to a person with whom you deal at arm's length (for more information, see Allowable business investment loss); and
  • any disposition of qualified small business corporation shares if you elect to defer the capital gains that resulted from it. For more information, see Capital gains deferral for investment in small business.

Capital gains deduction

If you have a capital gain when you sell qualified small business corporation shares, you may be eligible for the lifetime capital gains deduction. For more information, see Claiming a capital gains deduction.

Qualified farm and fishing property

Generally, when you dispose of qualified farm or fishing property, you report any capital gain or loss in this section of Schedule 3. Report dispositions of qualified farm property and qualified fishing property on lines 109 and 110 of Schedule 3. See the definitions of qualified farm property and qualified fishing property in Definitions.

If the capital gain or loss is from a mortgage foreclosure or conditional sales repossession, report it on lines 123 and 124 of Schedule 3. For more information, see Other mortgage foreclosures and conditional sales repossessions.

If you dispose of farm or fishing property, other than qualified farm or fishing property, report it on lines 136 and 138 of Schedule 3. For more information, see Real estate, depreciable property, and other properties.

Special reporting instructions apply to the disposition of eligible capital property that is qualified farm or fishing property. For more information, see the chapter called "Eligible Capital Expenditures" in Guide T4004, Fishing Income, Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.

Capital gains deduction

If you have a capital gain when you sell qualified farm or fishing property, you may be eligible for the lifetime capital gains deduction. For more information, see the section called Claiming a capital gains deduction.

Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares

Use this section to report a capital gain or loss when you sell shares or securities that are not described in any other section of Schedule 3. These include:

  • units in a mutual fund trust;
  • publicly traded shares;
  • shares that qualify as Canadian securities or prescribed securities, if they are not qualified small business corporation shares or qualified family farm corporation shares; and
  • shares issued by foreign corporations.

Report dispositions of units or shares on lines 131 and 132 of Schedule 3.

You should also use this section if you donate any of the following properties:

  • shares listed on a designated stock exchange;
  • shares of the capital stock of a mutual fund corporation;
  • units in a mutual fund trust; or
  • interest in a related segregated fund trust.

If you donated any of these properties to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate the capital gain to report on Schedule 3. For more information, see Pamphlet P113, Gifts and Income Tax.

If you sold any of the shares or units listed above in 2013, you will receive a T5008 slip, Statement of Securities Transactions, or an account statement.

You may buy and sell the same type of property (for example, units of a mutual fund trust or publicly traded shares) over a period of time. If so, you have to calculate the average cost of each property in the group at the time of each purchase to determine the adjusted cost base (ACB). For more information, see Adjusted cost base (ACB).

If you report a capital gain from the disposition of shares or other securities for which you filed Form T664, Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, see Chapter 4.

Note

If you own shares or units of a mutual fund, you may have to report the following capital gains (or losses):

  • capital gains (or losses) you realize when you sell your shares or units of the mutual fund (report these amounts in the "Publicly traded shares, mutual fund units, deferral of eligible small business corporation shares, and other shares" section of Schedule 3); and
  • capital gains realized by the fund from its investment portfolio which are then flowed out to you. For information on how to report these amounts, see Information slips - Capital gains (or losses).

For more information on mutual funds, see Information Sheet RC4169, Tax Treatment of Mutual Funds for Individuals.

For information on the deferral of capital gains incurred on the disposition of small business investments, see Capital gains deferral for investment in small business.

Employee security options

When you get an option to buy securities through your employer, it does not immediately affect your tax situation. An option is an opportunity to buy securities at a certain price. The securities under the option agreement may be shares of a corporation or units of a mutual fund trust.

If you decide to exercise your option and buy the securities at less than the fair market value (FMV), you will have a taxable benefit received through employment. The taxable benefit is generally the difference between what you paid for the securities and the FMV at the time you exercised your option. You can reduce the amount of the benefit by any amount you paid to acquire the option rights.

Note

The taxable benefit included in your income in connection with an employee option agreement is not eligible for the capital gains deduction.

Generally, an eligible employee is one who, right after the option is granted:

  • deals at arm's length with the employer, the entity granting the option, and the entity whose eligible securities could be acquired under the option agreement; and
  • is not a specified shareholder of an entity above that is a corporation. A specified shareholder is generally one who owns 10% or more of any class of a corporation's shares.

Such an employee must also be a resident of Canada at the time the option is exercised to qualify for the deferral.

Generally, an eligible security is:

  • a common share of a class listed on a designated stock exchange in or outside Canada; or
  • a unit of a mutual fund trust.

Generally, the amount paid to acquire the eligible security, including any amount paid to acquire the rights under the option agreement, cannot be less than the FMV of the security at the time the option is granted. In addition, the eligible security must be a security in respect of which a security option deduction may be claimed on line 249 of your income tax and benefit return.

If you buy shares through an employee security option granted to you by a Canadian-controlled private corporation (CCPC) with which you deal at arm's length, you do not include the taxable benefit in your income in the year you acquire the securities. You wait until the year you sell the securities.

For eligible securities under option agreements exercised up to and including 4:00 p.m. EST on March 4, 2010, that were not granted by a CCPC, an income deferral of the taxable benefit may have been allowable subject to an annual limit of $100,000 on the FMV of the eligible securities.

If this situation applies, the inclusion into income of the taxable benefit is deferred until the year in which the first of these events occurs:

  • the employee disposes of the eligible security;
  • the employee (or former employee) dies, or;
  • the employee (or former employee) becomes a non-resident.

If you exercised an option for eligible securities after 4:00 p.m. EST on March 4, 2010, that was not granted by a CCPC, the election to defer the security option benefit is no longer available.

If you qualify for a security option deduction on line 249 of your income tax and benefit return, you can claim one-half of the amount recognized (and reported as income) as an employment benefit from the sale of eligible securities in 2013.

Employee security option cash-out rights

If you acquire securities under a security option agreement and you meet certain conditions, you may be entitled to a deduction equal to one-half of the security option benefit (security option deduction). In this case, your employer cannot claim a deduction for the issuance of the share.

Employee security option agreements can also be structured in such a way that, you can dispose of your security option rights to your employer for a cash payment or other in-kind benefit (cash-out payment).

For such transactions occurring after 4:00 p.m. EST on March 4, 2010, the security option deduction can only be claimed in situations where either:

  • you exercise your options by acquiring shares of your employer; or
  • your employer has elected (as indicated by completing box 86, Security option election, of your T4 slip) for all security options issued or to be issued after 4:00 p.m. EST on March 4, 2010, under the agreement and files such election with the Minister of Revenue, that neither the employer nor any person not dealing at arm's length with the employer will claim a deduction for the cash-out payment in respect of your disposition of rights under the agreement.

Adjusted cost base (ACB) of eligible securities

Regardless of when the eligible security option was exercised, the ACB of the eligible security you purchased through an employee eligible security option agreement is not the actual price you paid for them. To calculate the ACB of your eligible securities, add the following two amounts:

  • the actual purchase price; and
  • any amount included in your income as a taxable employee option benefit for the securities (even if you claimed a security option deduction for them).

Disposition of eligible securities

Report the capital gain (or loss) in the year you exchange or sell the eligible securities purchased through an employee eligible security option agreement. If the eligible securities are qualified small business corporation shares, report the transaction in the "Qualified small business corporation shares" section of Schedule 3. In all other cases, report the transaction in the "Publicly traded shares, mutual fund units, deferral of small business corporation shares, and other shares" section of Schedule 3.

Remittance requirement

If you exercise your security options in 2013, your employer will be required to withhold and remit an amount in respect of the taxable security option benefit (less any security option deduction) in the same way as if the amount of the benefit had been paid to you as an employee bonus.

Special relief for tax deferral elections

If you are an eligible employee and you dispose of shares before 2015, and the disposition of the shares results in a security option benefit for which you made an election to defer the income inclusion (after February, 27, 2000, and up to and including 4:00 p.m. EST on March 4, 2010), you will be allowed to elect, by completing and submitting Form RC310, Election for Special Relief for Tax Deferral Election on Employee Security Options, to have the following tax treatment apply for the year of the disposition of the shares:

  • The amount of the security option deduction will be equal to the security option benefit (thereby eliminating the security option benefit).
  • You will be required to include in your income a taxable capital gain equal to one-half of the lesser of:
    • the security option benefit; and
    • the capital loss realized on the disposition of the optioned shares.
  • You will be required to pay a special tax equal to the proceeds of disposition of the optioned shares (or 2/3 of the proceeds of disposition, if you reside in Québec).

Deadlines to file the election for special relief

For shares (as described previously) disposed of in 2013, the deadline to file the election for special relief is the filing due date for your 2013 income tax and benefit return. Attach the completed Form RC310 to the paper copy of your return. If you are filing electronically, keep it in case we ask to see it at a later date.

Example

As a result of rights provided under an employee security option agreement, John purchased 1,000 shares of his employer, XYZ Public Co., in 2006, for $1 each at a time when the shares were trading for $15 each. John elected to defer the recognition of his $14,000 ($15,000 – $1,000) security option benefit until he disposes of the shares. When John decided to sell his shares in 2013, the shares were trading for $0.75. In 2013, John's marginal tax rate was 40% and he had no taxable capital gains that would enable him to benefit from any allowable capital losses.

Tax implications under the rules if John does not elect for special relief
Deferred security option benefit brought into income $ 14,000
Less: Security option deduction $ 7,000
Taxable portion of security option benefit (employment income) $ 7,000
Taxes on employment income $ 2,800
Allowable capital loss:
Proceeds $ 750
Adjusted cost base ($14,000 + $1,000) $ (15,000)
Capital loss $ (14,250)
Allowable capital loss (1/2 of capital loss) $ (7,125)

John elects, by submitting a completed Form RC310 with his return before May 1, 2014, to have the special relief apply in respect of the gains from this disposition.

Tax implications under the rules if John elects for special relief
Deferred security option benefit $ 14,000
Less: Security option deduction $ 14,000
Taxable portion of security option benefit (employment income) $ 0
Taxes on employment income $ 0
Deemed taxable capital gain

50% of the lesser of:

  • security option benefit of $14,000, and
  • capital loss of $14,250
$ 7,000
Allowable capital loss:
Proceeds $ 750
Adjusted cost base ($14,000 + $1,000) $ (15,000)
Capital loss $ (14,250)
Allowable capital loss (1/2 of capital loss) $ (7,125)
Allowable capital loss for the year $ (125)
Special tax equal to the proceeds of disposition of optioned shares $ 750

Donations under employee option agreements

If you donated shares or mutual fund units in 2013 under your employee option agreement to a qualified donee, use Form T1170, Capital Gains on Gifts of Certain Capital Property, to calculate your capital gain.

For a donation made in 2013, you may qualify for an additional security option deduction equal to 1/2 of the taxable benefit.

For more information on these donations, see Pamphlet P113, Gifts and Income Tax.

Stock splits and consolidations

Generally, a stock split takes place if a company's outstanding shares are divided into a larger number of shares, without changing the total market value of the company's holdings. The total market value of each investor's holdings, and their proportionate equity in the company, are also not affected.

For example, in the case of a 2-for-1 stock split, the number of shares is doubled and the price per share is decreased by 50%. If before the split, you owned 100 shares valued at $60 each, you would now own 200 shares each worth $30. If the stock split was 5-for-1, your previous 100 shares valued at $60 would become 500 shares, each worth $12. In each of these cases, the total market value is the same ($6,000). This also applies when a consolidation (reverse split) takes place, and the number of shares decreases and the price increases proportionally. For example, 600 shares worth $10 each that are consolidated 1-for-3 become 200 shares worth $30 each.

In each of the above cases, no stock dividend is considered to have been issued, no disposition or acquisition is considered to have occurred, and the event is not taxable. However, the adjusted cost base ( ACB ) of the shares must be recalculated to reflect each split or consolidation, and when there is a disposition of the shares, the new ACB will be used to calculate the capital gain or loss.

This ACB is calculated by dividing the total cost of the shares purchased (usually including any expenses involved in acquiring them) by the total number of shares owned. For example, if you owned 100 shares of XYZ Ltd. that cost $1,000 to purchase, the ACB of each share would be $10 ($1,000 ÷ 100). If the stocks subsequently split 2 for 1, you would now own 200 shares of XYZ Ltd. The ACB of each share must be recalculated and would now be $5 ($1,000 ÷ 200).

Real estate, depreciable property, and other properties

If you sold real estate or depreciable property in 2013, you have to report your capital gain or loss in this section. Report these dispositions on lines 136 and 138 of Schedule 3.

Do not use this section to report the sale of personal-use property (such as a cottage) or the sale of mortgages and other similar debt obligations on real property. Report these transactions under the sections called "Personal-use property" and "Bonds, debentures, promissory notes, and other similar properties," respectively.

Real estate

Real estate includes:

  • vacant land;
  • rental property (both land and buildings);
  • farm property, including both land and buildings (other than qualified farm property); and
  • commercial and industrial land and buildings.

For each real property you sold in 2013 that includes land and a building, you must:

  • determine how much of the selling price relates to the land and how much is for the building; and
  • report the sale of your land and building separately on Schedule 3.

To help you understand how to report a disposition of real property that includes land and a building, see the example Disposing of a principal residence partly used for earning income.

If you dispose of a building and end up with a loss, special rules may apply. Under these rules, you may have to consider your proceeds of disposition as an amount other than the actual proceeds. For more information, see Selling a building in 2013.

Special rules may also apply if you dispose of, or are considered to have disposed of, a property that was your principal residence for 1994 and for which you or your spouse or common-law partner has filed Form T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994. If this is your situation, see Disposing of your principal residence.

Depreciable property

When you dispose of depreciable property, you may have a capital gain. In addition, certain rules on capital cost allowance (CCA) may require that you add a recapture of CCA to your income or allow you to claim a terminal loss. You can find definitions of these and other terms used in this section in Definitions.

Capital gain

Usually, you will have a capital gain on depreciable property if you sell it for more than its adjusted cost base plus the outlays and expenses incurred to sell the property.

Note

A loss from the sale of depreciable property is not considered to be a capital loss. However, you may be able to claim a terminal loss.

Recapture of CCA and terminal losses

This section will provide you with a general look at the rules for the recapture of CCA and terminal losses.

Note

These rules do not apply to passenger vehicles in Class 10.1.

When you sell a depreciable property for less than its original capital cost, but for more than the undepreciated capital cost (UCC) in its class, you do not have a capital gain.

Generally, the UCC of a class is the total capital cost of all the properties of the class minus the CCA you claimed in previous years. If you sell depreciable property in a year, you also have to subtract from the UCC one of the following amounts, whichever is less:

  • the proceeds of disposition of the property minus the related outlays and expenses; or
  • the capital cost of the property.

If the UCC of a class has a negative balance at the end of the year, this amount is considered to be a recapture of CCA. Include this recapture in your income for the year of sale.

If the UCC of a class has a positive balance at the end of the year, and you do not have any properties left in that class, this amount is a terminal loss. Unlike a capital loss, you can deduct the full amount of the terminal loss from your income in that year.

If the balance for the UCC of a class is zero at the end of the year, then you do not have a recapture of CCA or a terminal loss.

For more information about CCA and how to report a recapture of CCA or a terminal loss, see the chapter called "Capital Cost Allowance (CCA)" in one of the following guides:

Example

In 2006, Peter bought a piece of machinery, at a cost of $10,000, for his business. It is the only property in its class at the beginning of 2013. The class has a UCC of $6,000. He sold the piece of machinery in 2013 and did not buy any other property in that class.

The following chart gives you three different selling prices (proceeds of disposition) to show how Peter would handle each situation (A, B, and C).

Description A
($)
B
($)
C
($)
Calculation of capital gain
Proceeds of disposition 4,000 8,000 12,000
Minus: Capital cost 10,000 10,000 10,000
Capital gain = 0 = 0 = 2,000
Calculation of terminal loss or (recapture of CCA)
Capital cost 10,000 10,000 10,000
Minus: CCA 2006-2012 4,000 4,000 4,000
UCC at the beginning of 2013 = 6,000 = 6,000 = 6,000
Minus the lesser of:
The capital cost of $10,000 and the proceeds of disposition 4,000 8,000 10,000
Terminal loss or (recapture of CCA) = 2,000 = (2,000) = (4,000)

In situation A, Peter does not have a capital gain. However, he does have a terminal loss of $2,000, which he can deduct from his business income.

In situation B, Peter does not have a capital gain. However, he does have a recapture of CCA of $2,000 that he has to include in his business income.

In situation C, Peter has a capital gain of $2,000. He also has a recapture of CCA of $4,000 that he has to include in his business income.

When you dispose of eligible capital property, you may qualify to make an election to treat the disposition as a capital gain, which you would report in this section of Schedule 3. For more information, see Eligible capital property.

Bonds, debentures, promissory notes, and other similar properties

Use this section to report capital gains or capital losses from the disposition of bonds, debentures, Treasury bills, promissory notes, and other properties. Other properties include bad debts, foreign exchange gains and losses, and options, as well as discounts, premiums, and bonuses on debt obligations. Report these dispositions on lines 151 and 153 of Schedule 3.

Donations made to a qualified donee of a debt obligation or right listed on a designated stock exchange, or a prescribed debt obligation, are treated differently. If you made such a donation, use Form T1170, Capital Gains on Gifts of Certain Capital Property. If you have a capital gain, report on Schedule 3 the amount calculated on Form T1170.

For more information on these donations, see Pamphlet P113, Gifts and Income Tax.

If you sold any of the types of properties listed above in 2013, you will receive a T5008 slip, Statement of Securities Transactions, or an account statement.

If you have bought and sold the same type of property over a period of time, a special rule may affect your capital gain (or loss) calculation. For more information, see Identical properties.

Treasury bills (T-bills) and stripped bonds

When a T-bill or a stripped bond is issued at a discount and you keep it until it matures, the difference between the issue price and the amount you cash it in for is considered to be interest that accrued to you. However, if you sell the T-bill or stripped bond before it matures, you may have a capital gain or loss in addition to the interest accrued at that time.

Before you calculate your capital gain or loss, you have to determine the amount of interest accumulated to the date of disposition. Subtract the interest from the proceeds of disposition and calculate the capital gain or loss in the usual way.

Example

Jesse bought a T-bill on May 1, 2013, for $49,500. The T-bill's term is 91 days and its maturity value on August 1, 2013, is $50,000. However, he sold it on June 13, 2013, for $49,750. The effective yield rate was 4.05%.

Jesse calculates interest on the T-bill as follows:

Purchase price × Effective
yield rate
× Number of days
T-bill held
÷ Number of days
in the year sold
= Interest to be
included in income
$49,500 × 4.05% × (44 ÷ 365) = $241.67

Jesse calculates his capital gain as follows:

Proceeds of disposition $ 49,750.00
Minus: Interest 241.67
Net proceeds of disposition $ 49,508.33
Minus: Adjusted cost base 49,500.00
Capital gain = $ 8.33

Bad debts

If a debt is owed to you (other than a debt under a mortgage or a debt resulting from a conditional sales agreement), and it remains unpaid after you have exhausted all means to collect it, it becomes a bad debt. The debt will be a capital loss if you acquired it:

  • to earn income from a business or property; or
  • as consideration or payment for the sale of capital property in an arm's length transaction.

In most cases, the capital loss is equal to the adjusted cost base of the debt.

To claim a capital loss on a bad debt, you have to file an election with your income tax and benefit return. To make this election, write and sign a letter stating that you want subsection 50(1) of the Income Tax Act to apply to the bad debt. Attach this letter to your return.

If the debt is from the sale of personal-use property to a person with whom you deal at arm's length, the situation is different. You can claim the capital loss in the year that the debt becomes a bad debt. However, the capital loss cannot be more than the capital gain you previously reported on the sale of the property that created the debt.

The recovery of any bad debt claimed as a capital loss will be treated as a capital gain in the year of recovery.

Note

If the bad debt involves a small business corporation, see Allowable business investment loss.

Foreign exchange gains and losses

Foreign exchange gains or losses from capital transactions in foreign currencies are considered to be capital gains or losses. However, you only have to report the amount of your net gain or loss for the year that is more than $200. If the net amount is $200 or less, there is no capital gain or loss and you do not have to report it on your income tax and benefit return.

Report your net gain or loss in Canadian dollars. Use the exchange rate that was in effect on the day of the transaction. If there were transactions at various times throughout the year, you can visit the Bank of Canada website, or go to What are the average exchange rates?

Other mortgage foreclosures and conditional sales repossessions

Report these dispositions on lines 154 and 155 of Schedule 3.

You may have held a mortgage on a property but had to repossess the property later because you were not paid all or a part of the amount owed under the mortgage. In this case, you may have to report a capital gain or loss.

The following rules also apply when property is repossessed under a conditional sales agreement.

If, as a mortgagee (a person who lends money under a mortgage), you repossess a property because the mortgagor failed to pay you the money owed under the mortgage, you are considered to have purchased the property. At the time of repossession, you do not have a capital gain or loss. Any gain or loss will be postponed until you sell the property.

If you are the mortgagor and your property is repossessed because you did not pay the money owed under the mortgage, you are considered to have sold the property. Depending on the amount you owed at the time of repossession, you may have a capital gain, a capital loss, or, in the case of depreciable property, a terminal loss. However, if the property is personal-use property, you cannot deduct the loss.

Note

If the capital gain or loss is from the disposition of qualified farm or fishing property, report the capital gain or loss on line 124 in the "Qualified farm property and qualified fishing property" section of Schedule 3.

Other tax implications

Capital gains from a mortgage foreclosure or a conditional sales repossession will be excluded from net income when calculating your claim for the goods and services tax/harmonized sales tax credit, the Canada Child Tax Benefit, credits allowed under certain related provincial or territorial programs, and the age amount. You should also exclude this income when calculating your social benefits repayment.

Personal-use property

Report these dispositions on line 158 of Schedule 3.

When you dispose of personal-use property, you may have a capital gain or loss. To calculate this gain or loss, follow these rules:

  • If the adjusted cost base (ACB) of the property is less than $1,000, its ACB is considered to be $1,000.
  • If the proceeds of disposition are less than $1,000, the proceeds of disposition are considered to be $1,000.
  • If both the ACB and the proceeds of disposition are $1,000 or less, you do not have a capital gain or a capital loss. Do not report the sale on Schedule 3 when you file your income tax and benefit return.

If you are disposing of your principal residence, see Chapter 6.

Note

If you acquire personal-use property for donation to a qualified donee (as defined in Definitions), in circumstances where it is reasonable to conclude that the acquisition of the property relates to an arrangement, plan, or scheme promoted by another person or partnership, the above rules do not apply. If this situation applies to you, calculate your capital gain or loss using the actual ACB and proceeds of disposition as discussed in Calculating your capital gain or loss.

When you dispose of personal-use property that has an ACB or proceeds of disposition of more than $1,000, you may have a capital gain or loss. You have to report any capital gain from disposing of personal-use property. However, if you have a capital loss, you usually cannot deduct that loss when you calculate your income for the year. In addition, you cannot use the loss to decrease capital gains on other personal-use property. This is because if a property depreciates through personal use, the resulting loss on its disposition is a personal expense.

These loss restrictions do not apply:

  • if you disposed of personal-use property that is listed personal property (see the next section); or
  • to a bad debt owed to you from the sale of a personal-use property to a person with whom you deal at arm's length. For more information, see Bad debts.
Example

Jane sold the following personal-use properties in 2013.

Property
sold
Proceeds
of disposition
Adjusted
cost base
Outlays
and
expenses
China cabinet $ 900 $ 500 $ 0
Boat $ 1,200 $ 850 $ 50
Personal computer $ 1,500 $ 3,200 $ 30

Jane calculates the capital gain or loss for each transaction as follows:

Calculation of capital gain (or loss) China cabinet
($)
Boat

($)
Personal computer
($)
Proceeds of disposition (greater of selling price and $1,000) 1,000 1,200 1,500
Minus:
ACB (greater of cost and $1,000) plus outlays and expenses
1,000 1,050 3,230
Capital gain (loss) = 0 = 150 = (1,730)

China cabinet – For the proceeds of disposition and the ACB, Jane uses $1,000, as both were less than that amount. As a result, there is no capital gain or loss for this transaction and Jane does not have to report it on Schedule 3.

Boat – Because the cost of the boat is less than $1,000, the ACB is considered to be $1,000. Jane reports $150 as a capital gain.

Personal computer – Jane's capital loss is not deductible. She also cannot use the loss to decrease any other capital gains realized in the year.

Listed personal property

Report these dispositions on line 159 of Schedule 3. See the definition of listed personal property (LPP) in Definitions.

To determine the value of many LPP items, you can have them appraised by a dealer. You can also refer to catalogues for the value of the properties.

Note

LPP gains do not include gains from selling or donating certified Canadian cultural property to a designated institution. For more information, see Selling or donating certified Canadian cultural property.

Because LPP is a type of personal-use property, the capital gain or loss on the sale of the LPP item is calculated the same way as for personal-use property. For more information about these rules, see Personal-use property.

If your 2013 gains from dispositions of LPP are more than your 2013 losses from such dispositions, you can use unapplied LPP losses from 2005 and later years to reduce your 2013 gains. If you want to do this, do not enter these losses on line 253 of your income tax and benefit return. Instead, subtract the unapplied LPP losses of previous years from your 2013 LPP gains. You should only complete the "Listed personal property" area of Schedule 3 if, after doing these calculations, you still have a net LPP gain in 2013.

If your 2013 losses from dispositions of LPP are more than your 2013 gains from such dispositions, the difference represents your LPP loss for the year. Keep a record of your LPP losses that have not expired so you can apply these losses against LPP gains in other years. An unapplied LPP loss expires when you do not use it by the end of the seventh year after you incurred it. For more information on applying LPP losses, see Applying listed personal property (LPP) losses.

Information slips – Capital gains (or losses)

Most capital gains and capital losses reported on Schedule 3 come from amounts shown on information slips.

Although you report most of these amounts on line 174 or line 176 (in the case of T3 slips) of Schedule 3, there are exceptions. For example, capital gains from qualified small business corporation shares and qualified farm or fishing property are eligible for the $375,000 lifetime capital gains deduction. Therefore, you have to report those gains on lines 107 or 110, whichever applies.

Chart 1 explains how to report the capital gains (or losses) and other amounts shown on certain information slips.


Chapter 3 – Special rules and other transactions

This chapter explains some of the special rules that may apply when you calculate your capital gain or loss. It also explains how to report some of the less common capital transactions.

Note

You may need to refer to Definitions for the definition of certain terms used in this chapter.

Adjusted cost base

In some cases, special rules may apply that will allow you to consider the cost of a property to be an amount other than its actual cost. This section explains these rules.

Identical properties

Properties of a group are considered to be identical if each property in the group is the same as all the others. The most common examples of identical properties are shares of the same class of the capital stock of a corporation or units of a mutual fund trust.

You may buy and sell several identical properties at different prices over a period of time. If you do this, you have to calculate the average cost of each property in the group at the time of each purchase to determine your adjusted cost base (ACB) (dispositions of identical properties do not affect the ACB). The average cost is calculated by dividing the total cost of identical properties purchased (this is usually the cost of the property plus any expenses involved in acquiring it) by the total number of identical properties owned.

Any amount reported in Box 42 – Amount resulting in cost base adjustment, of the T3 slip represents a change in the capital balance of the mutual fund trust identified on the slip. This amount is used when calculating the ACB reported on Schedule 3, Capital Gains or (Losses) in 2013 for the property in the year of disposition. For more information and an example of the calculation, see Information Sheet RC4169, Tax Treatment of Mutual Funds for Individuals.

If Box 42 contains a negative amount, add this amount to the adjusted cost base (ACB) of the units of the trust identified on the slip.

If Box 42 contains a positive amount, subtract this amount from the ACB of the units of the trust identified on the slip.

If the ACB of the trust units is reduced below zero during the tax year, the negative amount is deemed to be a capital gain in the year. The ACB of the trust units is deemed to be zero. Enter the amount of the capital gain on line 132 of your Schedule 3 (place a zero on line 131 since there is no actual sale of units).

Note

Generally, the following properties are not considered identical properties:

  • securities acquired under an employee option agreement that are subject to the benefit deferral or are designated and disposed of within 30 days; and
  • certain employer shares received by an employee as part of a lump-sum payment upon withdrawal from a deferred profit sharing plan.

As a result, the ACB averaging rule described above does not apply to these types of securities. Each of these securities will have its own ACB determined in the usual way.

You also use this method to calculate the average cost of identical bonds or debentures you bought after 1971. However, the average cost is based on the principal amount for each identical property, that is, the amount before any interest or premiums are added.

A bond, debenture, or similar debt obligation that a debtor issues is considered to be identical to another if:

  • the same debtor issues both; and
  • all the attached rights are the same.

The principal amount of individual debt obligations being the same is not enough for such debts to be considered identical properties. They must still meet the two conditions listed above.

Example 1
Over the years, Stephanie has bought and sold common shares of STU Ltd. The following chart shows how, after each purchase, the ACB of her shares changes.
Transaction A
Cost
($)
B
Number
of shares

A divided by B
ACB
($)

Purchase in 2001:
$15/share
1,500 100 15.00
Purchase in 2006:
$20/share
+ 3,000 + 150
New average cost = 4,500 = 250 18.00
Sale in 2008:
$18/share
3,600 200
Average cost = 900 = 50 18.00
Purchase in 2013:
$21/share
+ 7,350 + 350
New average cost = 8,250 = 400 20.63
Example 2
In 2001, Irina bought units of a mutual fund trust. When she bought them, Irina chose to reinvest her annual income distributions in more units. The following chart shows how the ACB of her units changes after each purchase.
Transaction A
Cost
($)
B
Number of
units
A divided by B
ACB ($)
Purchase in 2001:
$18.00/unit
15,000.00 833.3333 18.00
Reinvested distributions in 2001: $19.55/unit + 1,170.00 + 59.8466
New average cost = 16,170.00 = 893.1799 18.10
Reinvested distributions in 2002: $20.63/unit + 1,455.30 + 70.5429
New average cost = 17,625.30 = 963.7228 18.29
Sale in 2008: $18.29/unit 7,316.00 400.0000
Average cost = 10,309.30 = 563.7228 18.29
Reinvested distributions in 2013: $19.89/unit + 721.65 + 36.2821
New average cost = 11,030.95 = 600.0049 18.38

Property for which you filed Form T664 or T664(Seniors)

Special rules also apply to determine the adjusted cost base (ACB) of a property for which you filed Form T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994.

In most cases, if you filed Form T664 or T664(Seniors), you are considered to have sold your capital property at the end of February 22, 1994, and to have immediately reacquired it on February 23, 1994. The ACB of your property on February 23, 1994, depends on the type of property for which you filed an election. For example, if you filed an election for your interest in, or your shares of, a flow-through entity, in most cases the ACB of your interest or shares will not change.

If you filed an election for capital property, other than a flow-through entity, your ACB is usually the amount you designated as proceeds of disposition on Form T664 or T664(Seniors). If the property is a cottage, rental property, or other non-qualifying real property, your ACB is your designated proceeds of disposition minus the reduction for non-qualifying real property.

Also, if your designated proceeds of disposition were more than the fair market value of the property at the end of February 22, 1994, your ACB on February 23, 1994, may be reduced. In this case, complete Chart 2 or Chart 3 to determine your ACB on February 23, 1994.

Property you inherit or receive as a gift

If you receive property as a gift, you are generally considered to have acquired the property at its fair market value (FMV) on the date you received it. Similarly, if you win property in a lottery, you are considered to have acquired this prize at its FMV at the time you won it.

Generally, when you inherit property, the property's cost to you is equal to the deemed proceeds of disposition for the deceased. Usually, this amount is the FMV of the property right before the person's death. However, there are exceptions to this rule. For example, property that you inherit because your spouse or common-law partner died, or farm property or a woodlot transferred on death to a child, may be treated differently. See the chapter called "Deemed disposition of property" in Guide T4011, Preparing Returns for Deceased Persons, to find out which rules apply to your situation.

Selling a building in 2013

If you sold a building of a prescribed class in 2013, special rules may make the selling price an amount other than the actual selling price. This happens when you meet both of the following conditions:

  • You, or a person with whom you do not deal at arm's length, own the land on which the building is located, or the land adjoining the building if you need the land to use the building.
  • You sold the building for less than its cost amount and its capital cost.

Calculate the cost amount as follows:

  • If the building was the only property in the class, the cost amount is the undepreciated capital cost (UCC) of the class before the sale.
  • If more than one property is in the same class, you have to calculate the cost amount of each building as follows:
Capital cost of the building
Capital cost of all properties in the class that have not been previously disposed of
× UCC of the class =

Cost amount of the building

Note

You may have to recalculate the capital cost of a property to determine its cost amount if:

  • you acquired a property directly or indirectly from a person or partnership with whom you did not deal at arm's length; or
  • you acquired the property for some other purpose and later began to use it, or increased its use, to earn rental or business income.

For more information, call 1-800-959-8281.

If you sold a building under these conditions, this may restrict the terminal loss on the building and reduce the capital gain on the land. For more information, see Guide T4036, Rental Income, or Interpretation Bulletin IT-220, Capital Cost Allowance – Proceeds of Disposition of Depreciable Property, and its Special Release.

Selling part of a property

When you sell only part of a property, you have to divide the adjusted cost base (ACB) of the property between the part you sell and the part you keep.

Example

Lily owns 100 hectares of vacant land of equal quality. She decides to sell 25 hectares of this land. Since 25 is one quarter of 100, Lily calculates one quarter of the total ACB as follows:

Total ACB $ 100,000
Minus: The ACB of the part she sold
($100,000 × 1/4)
25,000
The ACB of the part she kept = $ 75,000

Therefore, the ACB for the 25 hectares she sold is $25,000.

For more information on selling part of a property, see Interpretation Bulletin IT-264, Part Dispositions, and its Special Release.

Capital gains deferral for investment in small business

Individuals (other than trusts) may defer capital gains incurred on certain small business investments disposed of in 2013. This deferral applies to dispositions where you use the proceeds to acquire another small business investment. The adjusted cost base (ACB) of the new investment is reduced by the capital gain deferred from the initial investment.

You may acquire shares from a spouse, common-law partner, or parent due to circumstances such as a death or the breakdown of a marriage or common-law partnership. For the purposes of the capital gains deferral, we consider you to have acquired such shares at the time and under the same circumstances that the related individual originally acquired them.

The capital gains deferral is also available to individuals involved in pooling their investments with another person or partnership. If you are part of such a qualifying pooling arrangement, call us for more information.

To qualify for the capital gains deferral for investment in small business, the investment must be in an eligible small business corporation.

Eligible small business corporation shares

The capital gains deferral applies only to eligible small business corporation shares. Eligible small business corporation shares have the following characteristics:

  • They consist of common shares issued by the corporation to you, the investor.
  • The issuing corporation must be an eligible small business corporation at the time the shares were issued.
  • The total carrying value of the assets of the corporation (that is, the amount at which the assets of the corporation would be valued for the purpose of the corporation's balance sheet as of that time if it was prepared in accordance with generally accepted accounting principles used in Canada at that time, except that an asset of a corporation that is a share or debt issued by a related corporation is deemed to have a carrying value of nil) and related corporations cannot exceed $50 million immediately before, and immediately after, the share was issued.
  • While you hold the shares, the issuing corporation is an eligible active business corporation.

To be able to defer the capital gain, you must have held the eligible small business corporation shares for more than 185 days from the date you acquired them.

The replacement shares have to be acquired at any time in the year in which the disposition is made or within 120 days after the end of that year.

For example, you acquire eligible small business corporation shares in October 2006 and dispose of them on June 9, 2013. You may acquire the replacement shares on or before April 30, 2014, which is within 120 days after the end of the tax year of the original disposition.

Calculating the capital gains deferral

The capital gains deferral is available for the disposition of eligible small business corporation shares made in 2013. The investment can be made by an individual in any particular corporation (or related group).

The permitted deferral of the capital gain from the disposition of eligible small business corporation shares is determined by the following formula:

Capital gains deferral = B × (D ÷ E)

where

B = the total capital gain from the original sale

E = the proceeds of disposition

D = the lesser of E and the total cost of all replacement shares

For dispositions in 2013, report the total capital gain on lines 131 and 132 of Schedule 3 and the capital gains deferral on line 161 of Schedule 3. The capital gain you must report in the year of disposition will be determined by subtracting the capital gain deferral from the total capital gain realized from the disposition.

Note

Deferred capital gains do not qualify for the capital gains deduction (line 254). Therefore, do not report on lines 106 and 107 of Schedule 3 any disposition of qualified small business corporation shares if you elect to defer the capital gains that resulted from the disposition of those shares. Instead, report such disposition on lines 131 and 132 of Schedule 3.

ACB reduction

You must use the capital gains deferral to reduce the ACB of each of the eligible replacement shares by the amount determined by the following formula:

ACB reduction = F × (G ÷ H)

where

F = capital gains deferral

G = the cost of replacement shares

H = the total cost of all the replacement shares

Other transactions

The remaining sections in this chapter have information on less common transactions.

Eligible capital property

If you disposed of eligible capital property that is qualified farm or fishing property, you may be able to claim the capital gains deduction, up to a maximum of $375,000.

For details on how to report the disposition of this type of property and what amounts are eligible for the capital gains deduction, see Guide T4004, Fishing Income, Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide. Read the chapter called "Eligible Capital Expenditures" in those guides.

Election on dispositions of eligible capital property

If you disposed of property from your cumulative eligible capital account, you may qualify to make an election for tax years ending after February 27, 2000. The election allows qualified individuals to treat dispositions of this type of property as capital gains instead of business income. Report the capital gain in the "Real estate, depreciable property, and other properties" section of the Schedule 3.

For details on how to calculate the capital gain as well as the conditions that must be met in order to qualify to make this election, see the chapter called "Eligible Capital Expenditures" in one of the following guides:

Note

If you disposed of eligible capital property after you ceased to carry on business, you cannot claim a reserve on the capital gains on the sale of that property. This is because the property is not considered to be sold in the course of your business.

Partnerships

A partnership does not pay tax on its capital gains or losses, and it does not report them on an income tax and benefit return. Instead, members of the partnership report their share of the partnership's capital gains or losses on their own return.

Certain partnerships may have to file a partnership information return (T5013 SUM, Summary of Partnership Income and a T5013 FIN, Partnership Financial Return), and send copies of the T5013, Statement of Partnership Income to report amounts flowed out to their members.

If you receive a T5013 slip, see Chart 1 to find out how to report your share of the capital gain or loss from the partnership.

However, if you are a member of a partnership that does not have to file a partnership information return for 2013, you have to report your share of any capital gain or loss from each disposition of capital property shown on the partnership financial statements in the appropriate area of Schedule 3. For example, if the capital gain is from disposing of depreciable property, report the gain in the Real estate, depreciable property, and other properties section.

If the partnership disposed of eligible capital property that is qualified fishing property or qualified farm property, part of the business income from the transaction may be a taxable capital gain. This amount qualifies for the capital gains deduction, up to a maximum of $375,000.

The chapter called "Eligible Capital Expenditures" in Guide T4004, Fishing Income, Guide T4003, Farming Income, Guide RC4060, Farming Income and the AgriStability and AgriInvest Programs, or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide, explains how to calculate and report this amount.

Capital gains reduction (flow-through entity)

A partnership is considered a flow-through entity. The last year in which you could claim the capital gains reduction was the 2004 tax year. To find out the special rules for 2005 and subsequent tax years and for more information on flow-through entities, see Chapter 4.

Capital gains deduction

You may be eligible for the capital gains deduction, up to a lifetime maximum of $375,000, if you are reporting any of the following amounts:

  • a capital gain from disposing of qualified small business corporation shares;
  • a capital gain from disposing of qualified farm property;
  • a capital gain from disposing of qualified fishing property after May 1, 2006; or
  • farming income from the disposition of eligible capital property that is qualified farm property or fishing income from the disposition of eligible capital property that is qualified fishing property.

The lifetime maximum was increased from $250,000 to $375,000 on capital gains arising from dispositions after March 18, 2007.

For more information, see Claiming a capital gains deduction.

Purchase of replacement property

In certain situations, you can elect to postpone or defer reporting the capital gain, recapture of capital cost allowance, or business income from disposing of property. Provided you meet certain conditions, you may want to do this when you use the proceeds of disposition of the property to purchase a replacement property. The election may defer the tax consequences on the above amounts until you sell the replacement property. You can make this election when you sell a business property or when a property you own is expropriated, destroyed, or stolen.

For more information on the election, see Interpretation Bulletin IT-491, Former Business Property, and its Special Release.

Transfers of property to your spouse or common-law partner or to a trust for your spouse or common-law partner

Before reading this section, read the definitions of spouse and common-law partner.

You generally do not have a capital gain or loss if you give capital property to your spouse or common-law partner, a spousal or common-law partner trust, or a joint spousal or common-law partner trust or an alter ego trust (for definitions of these trusts, see T4013, T3 Trust Guide).

At the time you give the gift, depending on the type of property you give, you are considered to receive an amount equal to:

  • the undepreciated capital cost for depreciable property; or
  • the adjusted cost base for other types of capital property.

Your spouse or common-law partner, or the trust for your spouse or common-law partner or for yourself, is considered to have bought the capital property for the same amount that you are considered to have sold it for.

You may have transferred or loaned property to your spouse or common-law partner, a person who has since become your spouse or common-law partner, or a trust for your spouse or common-law partner. If that person or the trust sells the property during your lifetime, you usually have to report any capital gain or loss from the sale. You usually have to do this if, at the time of the sale:

  • you are a resident of Canada; and
  • you are both still married or living in a common-law relationship.

If you are living apart because of a breakdown in the relationship, you may not have to report the capital gain or loss when your spouse or common-law partner sells the property. In such a case, you have to file an election with your income tax and benefit return.

For transfers of property made after May 22, 1985, you can file this election with your return for any tax year ending after the time you separated. However, for the election to be valid, you have to file it no later than the year your spouse or common-law partner disposes of the property. To make this election, attach to your return a letter signed by you and your spouse or common-law partner that states you do not want section 74.2 of the Income Tax Act to apply.

For transfers of property made before May 23, 1985, you have to file the election with your return for the tax year in which the separation occurred. To make this election, attach to your return a letter signed by you and your spouse or common-law partner that states you do not want subsection 74(2) of the Income Tax Act to apply.

If you sold the property to your spouse or common-law partner or a trust for your spouse or common-law partner and you were paid an amount equal to the fair market value (FMV) of the property, there is another way to report the sale. Generally, you can list the sale at the property's FMV, and report any capital gain or loss for the year you sold the property. To do this, you have to file an election with your return. To make this election, attach to your return a letter signed by you and your spouse or common-law partner. State that you are reporting the property as being sold to your spouse or common-law partner at its FMV and that you do not want subsection 73(1) of the Income Tax Act to apply.

If your spouse or common-law partner or the trust later sells the property, your spouse or common-law partner or the trust has to report any capital gain or loss from the sale.

A special situation exists if all of the following apply to you:

  • you owned capital property (other than depreciable property or a partnership interest) on June 18, 1971;
  • you gave the property to your spouse or common-law partner after 1971; and
  • your spouse or common-law partner later sold the property.

In this case, certain rules apply when calculating your and your spouse's or common-law partner's capital gain or loss to remove any capital gains accrued before 1972. For more information, see Interpretation Bulletin IT-209, Inter-vivos gifts of capital property to individuals directly or through trusts, and its Special Release.

Other transfers of property

If you give capital property as a gift, you are considered to have sold it at its FMV at the time you give the gift. Include any taxable capital gain or allowable capital loss on your return for the year that you give the gift.

If you sell property to someone with whom you do not deal at arm's length and the selling price is less than its FMV, your selling price is considered to be the FMV. Similarly, if you buy property from someone with whom you do not deal at arm's length, and the purchase price is more than the FMV, your purchase price is considered to be the FMV.

Special rules allow you to transfer property at an amount other than the property's FMV. If these rules apply to you, you may be able to postpone paying tax on any capital gains you had from the transfer. We note some of the more common transfers below.

Farm or fishing property

When you sell or transfer farm or fishing property, you may have a capital gain. If you transfer farm or fishing property to a child, or to a spouse or common-law partner, or to a spousal or common-law partner trust, you may be able to postpone any taxable capital gain or recapture of capital cost allowance. For more information on these types of transfers and other rules that apply to farm or fishing property, see Guide T4004, Fishing Income, Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide, or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.

Elections

You can postpone reporting a capital gain when you transfer property:

  • from an individual or partnership to a Canadian corporation; or
  • from an individual to a Canadian partnership.

For information on transfers to a Canadian corporation, see Information Circular 76-19, Transfer of Property to a Corporation under section 85.

For information on transfers to a Canadian partnership, see Interpretation Bulletin IT-413, Election by Members of a Partnership under subsection 97(2).

Selling or donating certified Canadian cultural property

You do not have to report a capital gain when you sell or donate certified Canadian cultural property (national treasures) to an institution or public authority designated by the Minister of Canadian Heritage. The Canadian Cultural Property Export Review Board certifies this property as cultural property and will give you a certificate for tax purposes. Cultural property can include paintings, sculptures, books, manuscripts, or other objects.

If you sell or donate certified cultural property to a designated institution, you may have a capital loss. The tax treatment of the loss will depend on what type of property you sold or donated. For example, the certified cultural property may be listed personal property. If this is the case, the rules for listed personal property losses will apply. For information on how to apply capital losses, see Chapter 5.

For more information, see Interpretation Bulletin IT-407, Dispositions of Cultural Property to Designated Canadian Institutions, or Pamphlet P113, Gifts and Income Tax.

Gifts of ecologically sensitive land

If you made a gift of ecologically sensitive land to certain qualified donees (other than to a private foundation), the inclusion rate of zero applies to your capital gain. Use Form T1170, Capital Gains on Gifts of Certain Capital Property, to report the amounts.

To qualify for the capital gains inclusion rate of zero, you must meet certain conditions, and other special rules may apply. For more information, see Pamphlet P113, Gifts and Income Tax.


Chapter 4 – Flow-through entities

This chapter provides information on the types of investments that are considered flow-through entities. It also provides information on how to calculate and report the capital gain or loss resulting from the disposition of shares of, or interests in, a flow-through entity. The information in this chapter also applies if, for the 1994 tax year, you filed Form T664, Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, for your shares of, or interest in, a flow-through entity. In addition, if you have any remaining unused exempt capital gains balance (ECGB), this chapter provides detailed information on how it can be used.

What is a flow-through entity?

You are a member of, or investor in, a flow-through entity if you own shares or units of, or an interest in, one of the following:

  1. an investment corporation;
  2. a mortgage investment corporation;
  3. a mutual fund corporation;
  4. a mutual fund trust;
  5. a related segregated fund trust;
  6. a partnership;
  7. a trust governed by an employees' profit-sharing plan;
  8. a trust maintained primarily for the benefit of employees of a corporation or two or more corporations that do not deal at arm's length with each other, where one of the main purposes of the trust is to hold interests in shares of the capital stock of the corporation or corporations, as the case may be, or any corporation not dealing at arm's length therewith;
  9. a trust established for the benefit of creditors in order to secure certain debt obligations; or
  10. a trust established to hold shares of the capital stock of a corporation in order to exercise the voting rights attached to such shares.

Exempt capital gains balance

When you filed Form T664 for your shares of, or interest in, a flow-through entity, the elected capital gain you reported created an exempt capital gains balance (ECGB) for that entity.

Note

Generally, your ECGB expired after 2004. If you did not use all of your ECGB by the end of 2004, you can add the unused balance to the adjusted cost base of your shares of, or interest in, the flow-through entity.

For 2004 and previous tax years, if you received property from a trust in satisfaction of all or a part of your interest in the trust (a flow-through entity described in items 7 to 10 above), you could elect to use the ECGB for the entity to increase the cost of property you received from the trust. For 2005 and future years, the election is no longer necessary because any unused ECGB can only be added to the cost of your interest in the flow-through entity.

Example

Andrew filed Form T664 for his 800 units in a mutual fund trust with his 1994 income tax and benefit return. He designated the fair market value of the units at the end of February 22, 1994, as his proceeds of disposition. Andrew claimed capital gains reductions of $500 in 1997 and $600 in 1998. At the end of 2003, his exempt capital gains balance was $2,250. In 2004, he had a $935 capital gain from the sale of 300 units. This left him with an unused balance of $1,315 at the end of 2004. In 2005 and future years, he can only add the unused ECGB to the cost of any remaining units:

1. ECGB carryforward to 2004 $ 2,250 1
2. Capital gains flowed out $ 2
3. Capital gains
from dispositions
+ 935 3
4. Line 2 plus line 3 = $ 935 4
5. Capital gains reduction 935 5
6. Unused ECGB at the end of 2004 = $ 1,315 6

The unused ECGB expired after 2004 so Andrew can add this amount to the adjusted cost base of his shares of, or interest in, the flow-through entity.

Disposing of your shares of, or interest in, a flow-through entity

When you dispose of your shares of, or interest in, a flow-through entity, calculate the capital gain or loss in the same way as with any other disposition of capital property (proceeds of disposition minus the adjusted cost base [ACB] and outlays and expenses).

Report these dispositions on Schedule 3 as follows:

For more information, see Chapter 2.

If you filed Form T664 for your shares of, or interest in, a flow-through entity, and the proceeds of disposition were more than the fair market value, the ACB of your investments may be affected. For more information, see Property for which you filed Form T664 or T664(Seniors).

Certain circumstances may create a special situation for a flow-through entity described in items 1 to 6 of What is a flow-through entity?. This happens if you dispose of your remaining shares of, or interest in, such an entity in the 1994 to 2013 tax years and have filed Form T664. If this is the case, in the year you dispose of the shares, use the ECGB available for the entity immediately before the disposition to increase the ACB of the shares or interests.

The ACB adjustment will either reduce your capital gain or will create or increase your capital loss from disposing of the shares or interest in the flow-through entity.


Chapter 5 – Capital losses

You have a capital loss when you sell, or are considered to have sold, a capital property for less than its adjusted cost base plus the outlays and expenses involved in selling the property. This chapter explains how to:

  • determine your adjustment factor;
  • report your 2013 net capital losses;
  • apply your unused 2013 net capital losses against your taxable capital gains of other years; and
  • apply your unused net capital losses of other years against your 2013 taxable capital gains.

It also explains the special rules that apply to listed personal property losses, superficial losses, restricted farm losses, and allowable business investment losses.

You will find a summary of the loss application rules.

Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gain for that year. If you still have a loss, it becomes part of the computation of your net capital loss for the year. You can use a net capital loss to reduce your taxable capital gain in any of the three preceding years or in any future year.

Example

In 2013, Leah sold two different securities, which resulted in a taxable capital gain of $300 (1/2 x $600) and an allowable capital loss of $500 (1/2 x $1,000). After applying her allowable capital loss against her taxable capital gain, Leah has $200 ($500 $300) of unapplied allowable capital losses.

While she cannot deduct the $200 from other sources of income in 2013, the $200 becomes part of the computation of her net capital loss for 2013. She can apply the net capital loss against her taxable capital gains in any of the three preceding years or in any future year.

Leah completes Schedule 3 and attaches it to her 2013 income tax and benefit return. This will ensure that her net capital loss is updated on our records.

Note

When determining your capital losses, special rules apply if you disposed of:

Inclusion rate

The rate used to determine taxable capital gains and allowable capital losses, called an inclusion rate (IR), has changed over the years. As a result, the amount of net capital losses of other years that you can claim against your taxable capital gain depends on the inclusion rate that was in effect when the loss and the gain were incurred. Also, the way you apply these losses may differ if you incurred them before May 23, 1985. For more information, see How do you apply your net capital losses of other years to 2013?

Period net capital loss incurred Inclusion rate
Before May 23, 1985 1/2 (50%)
After May 22, 1985, and before 1988 1/2 (50%)
In 1988 and 1989 2/3 (66.6666%)
From 1990 to 1999 3/4 (75%)
In 2000 IR*
From 2001 to 2013 1/2 (50%)

* This rate is from line 16 in Part 4 of Schedule 3 for 2000, or from your notice of assessment or latest notice of reassessment for 2000.

If you had a capital loss or gain in 2013, you should have completed Schedule 3, Capital Gains (or Losses) in 2013.

How do you apply your 2013 net capital loss to previous years?

You can carry your 2013 net capital loss back to 2010, 2011, and 2012 and use it to reduce your taxable capital gains in any of these years. When you carry back your net capital loss, you can choose the year(s) to which you apply the loss.

Note

When you apply a net capital loss back to a previous year's taxable capital gain, it will reduce your taxable income for that previous year. However, your net income, which is used to calculate certain credits and benefits, will not change.

If you carry your 2013 net capital loss back to 2010, 2011, or 2012, you do not have to adjust the amount of the 2013 net capital loss since the inclusion rate is the same for these years.

To apply a 2013 net capital loss to 2010, 2011, or 2012, complete "Section III – Net capital loss for carryback" on Form T1A, Request for Loss Carryback. It will also help you determine the amount you have left to carry forward to future years. Do not file an amended income tax and benefit return for the year to which you want to apply the loss.

Note

If you apply a 2013 net capital loss to a previous year, any capital gains deduction that you claimed in that year, or a following year, may be reduced.

How do you apply your net capital losses of other years to 2013?

You can apply your net capital losses of other years to your taxable capital gains in 2013. To do this, claim a deduction on line 253 of your 2013 income tax and benefit return. However, the amount you claim depends on when you incurred the loss. This is because the inclusion rate used to determine taxable capital gains and allowable capital losses has changed over the years. For a list of these, see Inclusion rates above.

Note

When you apply a net capital loss from a previous year to the current year's taxable capital gain, it will reduce your taxable income for the current year. However, your net income, which is used to calculate certain credits and benefits, will not change.

You have to apply net capital losses of earlier years before you apply net capital losses of later years. For example, if you have net capital losses in 1994 and 1996 and want to apply them against your taxable capital gains in 2013, you have to follow a certain order. First, apply your 1994 net capital loss against your taxable capital gain. Then apply your 1996 net capital loss against it. Keep separate balances of unapplied net capital losses for each year. This will help you keep track of your capital losses.

You can use a net capital loss of a previous year to reduce a taxable capital gain in 2013. If the inclusion rates for the two years are different, you must adjust the amount of the net capital loss to match the inclusion rate for 2013. Determine the adjustment factor by dividing the inclusion rate for 2013 by the inclusion rate for the year in which the loss arose.

Example

Andrew realized a capital gain of $5,000 in 2013. Andrew's taxable capital gain for 2013 is $2,500 ($5,000 x 50%). Andrew has a net capital loss of $1,000 from 1999 to apply against his taxable capital gain of $2,500. Since the inclusion rate in 1999 was 75%, he calculates the adjustment factor as follows:

Inclusion rate for the year to which the loss is applied = 50% = 66.6666%
Inclusion rate for the year in which the loss arose 75%

To determine the net capital loss he can carry forward to 2013, Andrew multiplies the adjustment factor by the net capital loss for 1999:

Net capital loss for carryforward = Adjustment factor × net capital loss
= 66.6666% × $1,000
= $666.66

Andrew claims the adjusted net capital loss of $666.66 on line 253 against his taxable capital gain of $2,500 reported on line 127 of his 2013 income tax and benefit return.

Complete Chart 5 if you have a balance of unapplied net capital losses from before May 23, 1985, or you want to keep a breakdown of your unapplied net capital losses by year.

However, if you do not have a balance of unapplied net capital losses from before May 23, 1985, and your 2012 notice of assessment or notice of reassessment shows that you have unapplied net capital losses of other years and/or a 2012 net capital loss, you can use Chart 4 to determine your net capital losses of other years that you can apply to 2013.

Losses incurred before May 23, 1985

Special rules apply to losses you incurred before May 23, 1985. This also includes losses you incurred after May 22, 1985, on any disposition of capital property made under an agreement of sale you entered into before May 23, 1985.

Usually, you can apply net capital losses of other years only against taxable capital gains. However, if you incurred the losses before May 23, 1985, you may use them to offset other income. Once you have applied your net capital losses of other years against taxable capital gains, you can use any excess to offset other income. The amount you can use is limited to the least of:

  • the excess amount;
  • $2,000; and
  • your pre-1986 capital loss balance available for 2013.

Your pre-1986 capital loss balance available for 2013 is:

  • the unapplied balance of your total net capital losses that you had at any time before May 23, 1985;

minus

  • the total adjusted amount of capital gains deductions that you claimed before 2013.

If you had a net capital loss during the period from January 1, 1985, to May 22, 1985, and you had taxable capital gains later in 1985, your taxable capital gains will reduce your pre-1986 capital loss balance.

For an illustration of how to complete Chart 5, see the example.

Applying listed personal property losses

You have a listed personal property (LPP) loss if, in a particular year, your losses from dispositions of LPP are more than your gains from such dispositions. Applying this type of loss is different from applying other capital losses because:

  • you can only deduct losses from the disposition of LPP from any gains you had from selling other LPP;
  • the LPP losses you deduct in the year cannot be more than your LPP gains from such dispositions for that year; and
  • you cannot use this type of loss to reduce any capital gains you had from selling other types of property.

If you have an LPP loss in 2013, you can use the loss to reduce gains from dispositions of LPP you had in any of the three years before 2013 or the seven years after.

For information on how to apply a prior-year LPP loss to 2013 gains from dispositions of LPP, see Listed personal property.

To carry back your 2013 LPP losses to reduce your LPP net gains from 2010, 2011 and 2012, complete Form T1A, Request for Loss Carryback, and include it with your 2013 income tax and benefit return (or send one to us separately). Do not file an amended return for the year to which you want to apply the loss.

Example

Nathan bought some jewellery in 1997 for $5,800. In 2013, he sold it for $6,000. He ended up with a gain of $200. He also sold a coin collection for $2,000 in 2013. Nathan had originally bought this collection in 1999 for $1,700. He ended up with a gain of $300 when he sold the coin collection. In addition, he sold a painting in 2013 for $8,000. However, Nathan bought the painting in 2000 for $12,000. Therefore, he had a loss of $4,000. He had no outlays and expenses for these three transactions.

Nathan's loss from selling LPP in 2013 was more than his gain: his loss was $4,000; his total gain was $500 ($200 + $300). As a result, his net loss was $3,500 ($4,000 − $500). Nathan cannot use the difference to offset his capital gain on the sale of a property other than on LPP in the year. In addition, he cannot offset any income he had from other sources. However, he can apply his LPP loss against his gains from dispositions of LPP in any of the three preceding years or the seven years following 2013.

Nathan should not complete Schedule 3 for 2013. However, he should keep a record of his LPP loss in case he wants to apply the loss against LPP gains in another year.

Superficial loss

A superficial loss can occur when you dispose of capital property for a loss and:

  • you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale; and
  • you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.

Some examples of affiliated persons are:

  • you and your spouse or common-law partner;
  • you and a corporation that is controlled by you or your spouse or common-law partner;
  • a partnership and a majority-interest partner of the partnership; and
  • after March 22, 2004, a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary.

If you have a superficial loss in 2013, you cannot deduct it when you calculate your income for the year. However, if you are the person who acquires the substituted property, you can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. This will either decrease your capital gain or increase your capital loss when you sell the substituted property.

In certain situations, when you dispose of capital property, the loss may not be considered a superficial loss. Some of the more common situations include the following:

  • You are considered to have sold the capital property because you became or ceased to be a resident of Canada.
  • You are considered to have sold the property because you changed its use.
  • You disposed of the property and within 30 calendar days after the disposition you became or ceased to be exempt from income tax.
  • The property is considered to have been sold because the owner died.
  • The disposition results from the expiry of an option.
  • The property is appropriated by a shareholder on the winding-up of a corporation.
  • Non-depreciable capital property is disposed of by a corporation, partnership, or trust. In this situation, although the loss is not added to the adjusted cost base of the transferred property, it is not claimed immediately but its recognition is deferred pending the occurrence of certain events. For more information, call 1-800-959-8281 .

Restricted farm loss

If you run your farm as a business, you may be able to deduct a farm loss in the year. However, if your chief source of income is neither from farming nor from a combination of farming and some other source of income, you can only deduct a portion of your farm loss for the year.

For tax years ending after March 20, 2013, the amount that you can deduct may increase. For more information, see Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide, or RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.

The portion of the loss that you cannot deduct becomes a restricted farm loss (RFL). You can carry an RFL incurred in tax years ending before 2006 back 3 years and forward up to 10 years.

You can now carry an RFL incurred in tax years ending after 2005, back 3 years and forward up to 20 years.

However, the amount you can deduct in any year cannot be more than your net farming income for that year. For more information on determining your chief source of income and how to calculate an RFL, see Guide T4003, RC4060, or RC4408.

You may have RFLs that you incurred in your farming operation that you could not deduct when you calculated your income for previous years. You can apply part of these RFLs against any capital gain you may have when you sell your farmland. The amount of RFLs that you can apply cannot be more than the property taxes and the interest on money you borrowed to buy the farmland that were included in the calculation of the RFLs for each year. Reduce your capital gain by adding these amounts to the adjusted cost base (ACB) of your farmland. Also, you have to reduce your RFL balance by these amounts.

You can only use RFLs to reduce any capital gain from selling your farmland to zero. You cannot use an RFL to create or increase a capital loss from selling farmland.

Example

Fritz sold his farmland in 2013 for $200,000. The ACB of the property was $160,000. Fritz has an unapplied RFL of $20,000 from 2000. This amount includes $5,000 for property taxes, $5,000 for interest, and $10,000 for other expenses.

Fritz wants to reduce his capital gain from selling his farmland by applying his RFL against the capital gain. He calculates his capital gain as follows:

Proceeds of disposition $ 200,000 A
Adjusted cost base $ 160,000 B
Plus: Property taxes + 5,000 C
Interest + 5,000 D
Total = $ 170,000 Arrow: transfer result to the right column 170,000 E
Capital gain (line A minus line E) = $ 30,000 F

Fritz can only apply the portion of his RFL that relates to property taxes and interest on the money he borrowed to buy the farmland.

Allowable business investment loss

If you had a business investment loss in 2013, you can deduct 1/2 of the loss from income. The amount of the loss you can deduct from your income is called your allowable business investment loss (ABIL). Complete Chart 6 to determine your ABIL and, if applicable, your business investment loss reduction. Claim the deduction for the ABIL on line 217 of your income tax and benefit return. Enter the gross business investment loss on line 228 of your return.

What is a business investment loss?

A business investment loss results from the actual or deemed disposition of certain capital properties. It can happen when you dispose of one of the following to a person you deal with at arm's length:

  • a share of a small business corporation; or
  • a debt owed to you by a small business corporation.

For business investment loss purposes, a small business corporation includes a corporation that was a small business corporation at any time during the 12 months before the disposition.

You may also have such a loss if you are deemed to have disposed of, for nil proceeds of disposition, a debt or a share of a small business corporation under any of the following circumstances:

  • A small business corporation owes you a debt (other than a debt from the sale of personal-use property) that is considered to be a bad debt at the end of the year.
  • At the end of the year, you own a share (other than a share you received as consideration from the sale of personal-use property) of a small business corporation that:
    • has gone bankrupt in the year;
    • is insolvent, and a winding-up order has been made in the year under the Winding-up Act ; or
    • is insolvent at the end of the year and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share in the corporation has a fair market value of nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not start to carry on business*.

    * You or a person that you do not deal with at arm's length will be deemed to have realized an offsetting capital gain if the corporation, or a corporation it controls, carries on business within 24 months following the end of the year in which the disposition occurred. You or that person will have to report the capital gain in the tax year the corporation starts to carry on business. This applies if you or the person owned the share in the corporation at the time the business started.

You can elect to be deemed to have disposed of the debt or the share of the small business corporation at the end of the year for nil proceeds of disposition, and to have immediately reacquired the debt or the share after the end of the year at a cost equal to nil. To do this, you have to file an election with your income tax and benefit return. To make this election, attach to your return a letter signed by you. State that you want subsection 50(1) of the Income Tax Act to apply.

What happens when you incur an ABIL?

You can deduct your ABIL from your other sources of income for the year. If your ABIL is more than your other sources of income for the year, include the difference as part of your non-capital loss. You could have carried a non-capital loss arising in 2003 or prior years, back three years and forward seven years.

You can carry a non-capital loss arising in tax years ending after March 22, 2004 through December 31, 2005, back 3 years and forward 10 years.

Although you can generally carry a non-capital loss arising in tax years ending after 2005, back three years and forward 20 years, this extension does not apply to a non-capital loss resulting from an ABIL. Instead, an ABIL that has not been used within ten tax years will become a net capital loss in the eleventh year.

To carry a non-capital loss back to 2010, 2011, or 2012, complete Form T1A, Request for Loss Carryback, and include it with your 2013 income tax and benefit return (or send one to us separately). Do not file an amended return for the year to which you want to apply the loss.

If you did not deduct your ABIL arising in 2003 as a non-capital loss by the end of the seventh year (2010), the unapplied part became a net capital loss in 2011. You can use this loss to reduce your taxable capital gains in 2011 or any year after.

The unapplied part of your non-capital loss resulting from an ABIL arising in 2004 or future years will become a net capital loss in the eleventh year.

Note

Any ABIL that you claim for 2013 will reduce the capital gains deduction you can claim in 2013 and in future years.

Summary of loss application rules


Chapter 6 – Principal residence

When you sell your home, you may realize a capital gain. If the property was your principal residence for every year you owned it, you do not have to report the sale on your income tax and benefit return. However, if at any time during the period you owned the property it was not your principal residence, you may have to report all or part of the capital gain.

This chapter explains the meaning of a principal residence, how you designate a property as such, and what happens when you sell it. It also explains what to do in other special tax situations.

If after reading this chapter you need more information, see Income Tax Folio S1-F3-C2, Principal Residence.

What is a principal residence?

Your principal residence can be any of the following types of housing units:

  • a house;
  • a cottage;
  • a condominium;
  • an apartment in an apartment building;
  • an apartment in a duplex; or
  • a trailer, mobile home, or houseboat.

A property qualifies as your principal residence for any year if it meets all of the following four conditions:

  • It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
  • You own the property alone or jointly with another person.
  • You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
  • You designate the property as your principal residence.

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (1.24 acres). However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare.

Designating a principal residence

You designate your home as your principal residence when you sell or are considered to have sold all or part of it. You can designate your home as your principal residence for the years that you own and use it as your principal residence. However, you do not have to designate it each year. For more information, see the section called Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).

Can you have more than one principal residence?

For 1982 and later years, you can only designate one home as your family's principal residence for each year.

For 1982 to 2000, your family included:

  • you;
  • a person who, throughout the year, was your spouse (unless you were separated for the entire year under the terms of a court order or a written agreement); and
  • your children (other than a child who had a spouse during the year or who was 18 or older).

If you did not have a spouse and were not 18 or older, your family also included:

  • your mother and your father; and
  • your brothers and sisters (who did not have spouses and were not 18 or older during the year).

For 2001 to 2013, the above definition applies except that the reference to spouse is replaced by spouse or common-law partner.

For 1993 to 2000, a spouse included a common-law spouse. Therefore, common-law spouses could not designate different housing units as their principal residence for any of those years.

Note

If you made an election to have your same-sex partner considered your common-law partner for 1998, 1999, and/or 2000, then, for those years, your common-law partner also could not designate a different housing unit as his or her principal residence.

For years before 1982, more than one housing unit per family can be designated as a principal residence. Therefore, a husband and wife can designate different principal residences for these years. However, a special rule applies if members of a family designate more than one home as a principal residence. For more information, see Income Tax Folio S1-F3-C2, Principal Residence.

Disposing of your principal residence

When you sell your home or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return and you do not have to pay tax on any gain from the sale. This is the case if the home was your principal residence for every year you owned it.

If your home was not your principal residence for every year that you owned it, you have to report the part of the capital gain on the property that relates to the years for which you did not designate the property as your principal residence. To do this, complete Form T2091(IND).

Note

Because your home is considered personal-use property, if you have a loss at the time you sell or are considered to have sold your home, you are not allowed to claim the loss.

If only a part of your home qualifies as your principal residence and you used the other part to earn or produce income, you have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this by using square metres or the number of rooms, as long as the split is reasonable. Report only the gain on the part you used to produce income. For more information, see Real estate, depreciable property, and other properties and Income Tax Folio S1-F3-C2, Principal Residence.

Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)

Use Form T2091(IND) to designate a property as a principal residence. This form will help you calculate the number of years that you can designate your home as your principal residence, as well as the part of the capital gain, if any, that you have to report. Complete Form T2091(IND), if you:

  • sold, or were considered to have sold, your principal residence, or any part of it; or
  • granted someone an option to buy your principal residence, or any part of it.

You only have to include Form T2091(IND) with your income tax and benefit return if you have to report a capital gain.

A legal representative (executor, administrator, or a liquidator in Quebec) of a deceased person should use Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual, to designate a property as a principal residence for the deceased.

Did you or your spouse or common-law partner file Form T664 or T664(Seniors)?

Use Form T2091(IND) to calculate the capital gain if you sell, or are considered to have sold, a property for which you or your spouse or common-law partner filed Form T664 or T664(Seniors), Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, and:

  • the property was your principal residence for 1994; or
  • you are designating it in 2013 as your principal residence for any tax year.

Use Form T2091(IND)-WS, Principal Residence Worksheet, to calculate a reduction due to the capital gains election. In this case, if the property was designated as a principal residence for the purpose of the capital gains election, you have to include those previously designated tax years as part of your principal residence designation in 2013.

Note

If, at the time of the election, the property was designated as a principal residence for any tax year other than 1994, you can choose whether or not to designate it again as your principal residence when you sell it or are considered to have sold it. Remember, if you choose to designate it again, you have to include those previously designated tax years as part of your principal residence designation in 2013.

If the property was not your principal residence for 1994 and you are not designating it in 2013 as your principal residence for any tax year, do not use Form T2091(IND) and Form T2091(IND)-WS to calculate your capital gain. Instead, calculate your capital gain, if any, in the regular way (proceeds of disposition minus the adjusted cost base and outlays and expenses). For more information on how to calculate your adjusted cost base as a result of the capital gains election, see Property for which you filed Form T664 or T664(Seniors).

Changes in use

You can be considered to have sold all or part of your property even though you did not actually sell it. The following are some sample situations:

  • You change all or part of your principal residence to a rental or business operation.
  • You change your rental or business operation to a principal residence.

Every time you change the use of a property, you are considered to have sold the property at its fair market value and to have immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss (in certain situations) in the year the change of use occurs.

If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence. For information on how to calculate and report the gain, if any, see Disposing of your principal residence.

If you were using the property to earn or produce income before you changed its use, see Real estate, depreciable property, and other properties for information on how to report any capital gain or loss.

Special situations

In certain situations, the rules stated above for changes in use do not apply. The following are some of the more common situations.

Changing all your principal residence to a rental or business property

When you change your principal residence to a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election:

  • you have to report the net rental or business income you earn; and
  • you cannot claim capital cost allowance (CCA) on the property.

While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence. However, you can only do this if you do not designate any other property as your principal residence for this time.

You can extend the four-year limit indefinitely if all of the following conditions are met:

  • You live away from your principal residence because your employer, or your spouse's or common-law partner's employer wants you to relocate.
  • You and your spouse or common-law partner are not related to the employer.
  • You return to your original home while you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year in which this employment ends, or you die during the term of employment.
  • Your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your, or your spouse's or common-law partner's, new place of employment.

If you make this election, there is no immediate effect on your income tax situation when you move back into your residence. However, if you change the use of the property again and do not make this election again, any gain you have from selling the property may be subject to tax.

To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.

If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income. If so, see Guide T4002, Business and Professional Income , or Guide T4036, Rental Income.

Changing your rental or business property to a principal residence

When you change your rental or business property to a principal residence, you can elect to postpone reporting the disposition of your property until you actually sell it. However, you cannot make this election if you, your spouse or common-law partner, or a trust under which you or your spouse or common-law partner is a beneficiary has deducted CCA on the property for any tax year after 1984, and on or before the day you change its use.

This election only applies to a capital gain. If you claimed CCA on the property before 1985, you have to include any recapture of CCA in your business or rental income. Include the income in the year you changed the use of the property. If you need more information on the recapture of CCA, see Guide T4002, Business and Professional Income, or Guide T4036, Rental Income.

If you make this election, you can designate the property as your principal residence for up to four years before you actually occupy it as your principal residence.

To make this election, attach to your income tax and benefit return a letter signed by you. Describe the property and state that you want subsection 45(3) of the Income Tax Act to apply. You have to make this election by whichever of the following dates is earlier:

  • 90 days after the date we ask you to make the election; or
  • the date you are required to file your income tax and benefit return for the year in which you actually sell the property.

Changing part of your principal residence to a rental or business property

You are usually considered to have changed the use of part of your principal residence when you start to use that part for rental or business purposes. However, you are not considered to have changed its use if:

  • your rental or business use of the property is relatively small in relation to its use as your principal residence;
  • you do not make any structural changes to the property to make it more suitable for rental or business purposes; and
  • you do not deduct any CCA on the part you are using for rental or business purposes.

If you meet all of the above conditions, the whole property may qualify as your principal residence, even though you are using part of it for rental or business purposes.

However, if you do not meet all of the above conditions, when you actually sell the property you have to:

  • split the selling price between the part you used for your principal residence and the part you used for rental or business purposes. We will accept a split based on square metres or the number of rooms as long as the split is reasonable; and
  • report any capital gain on the part you used for rental or business purposes. For more information, see Real estate, depreciable property, and other properties. You do not have to report any capital gain for the part you used for your principal residence.
Note

You cannot file an election under subsection 45(2) of the Income Tax Act, as discussed in the previous section, if there is only a partial change in use of a property.

Farm property

If you are a farmer and you sell land in 2013 used principally in a farming business that includes your principal residence, you can choose one of two methods to calculate your taxable capital gain. We explain these two methods in Guide T4003, Farming Income, RC4060, Farming Income and the AgriStability and AgriInvest Programs Guide, and RC4408, Farming Income and the AgriStability and AgriInvest Programs Harmonized Guide.

Example


References

To get the following publications go to Forms and publications or call 1-800-959-8281 .

Forms

RC310 Election for Special Relief for Tax Deferral Election on Employee Security Options

T1A Request for Loss Carryback

T123 Election on Disposition of Canadian Securities

T657 Calculation of Capital Gains Deduction for 2013

T936 Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2013

T1105 Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972

T1170 Capital Gains on Gifts of Certain Capital Property

T1212 Statement of Deferred Security Options Benefit

T1255 Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual

T2017 Summary of Reserves on Dispositions of Capital Property

T2091(IND) Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)

T2091(IND)-WS Principal Residence Worksheet

Income Tax Folios

S1-F3-C2 Principal Residence

S5-F1-C1 Determining an Individual's Residence Status

Information Circulars

IC76-19 Transfer of Property to a Corporation Under Section 85

IC78-10 Books and Records Retention/Destruction

Information Sheet

RC4169 Tax Treatment of Mutual Funds for Individuals

Interpretation Bulletins

IT-95 Foreign Exchange Gains and Losses

IT-96 Options Granted by Corporations To Acquire Shares, Bonds, or Debentures and by Trusts To Acquire Trust Units

IT-113 Benefits to Employees – Stock Options

IT-125 Dispositions of Resource Properties

IT-128 Capital Cost Allowance – Depreciable Property

IT-159 Capital Debts Established To Be Bad Debts

IT-209 Inter-Vivos Gifts of Capital Property to Individuals Directly or Through Trusts, and its Special Release

IT-213 Prizes From Lottery Schemes, Pool System Betting and Giveaway Contests

IT-218 Profit, Capital Gains and Losses From the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate From Capital Property to Inventory and Vice Versa

IT-220 Capital Cost Allowance – Proceeds of Disposition of Depreciable Property , and its Special Release

IT-232 Losses – Their Deductibility in the Loss Year or in Other Years

IT-264 Part Dispositions, and its Special Release

IT-391 Status of Corporations

IT-407 Dispositions of Cultural Property to Designated Canadian Institutions

IT-413 Election by Members of a Partnership Under Subsection 97(2)

IT-419 Meaning of Arm's Length

IT-456 Capital Property – Some Adjustments to Cost Base, and its Special Release

IT-458 Canadian-Controlled Private Corporation

IT-459 Adventure or Concern in the Nature of Trade

IT-478 Capital Cost Allowance – Recapture and Terminal Loss

IT-479 Transactions in Securities, and its Special Release

IT-484 Business Investment Losses

IT-491 Former Business Property, and its Special Release

IT-511 Interspousal and Certain Other Transfers and Loans of Property


For more information

What if you need help?

If you need more information after reading this guide go to Capital gains, or call 1-800-959-8281 .

Forms and publications

Throughout this guide, we refer to other forms and publications that give more specific information related to capital gains and losses.

In the section called References, you will find a listing of the different types of forms and publications we refer to most often.

To get our forms or publications, go to Forms and publications, or call 1-800-959-8281 .

My Account

Using the CRA's My Account service is a fast, easy, and secure way to access and manage your tax and benefit information online, seven days a week!

You can use either your CRA user ID and password or your online banking user ID and password to log in to My Account.

Tax Information Phone Service (TIPS)

For personal and general tax information by telephone, use our automated service, TIPS, by calling 1-800-267-6999 .

Teletypewriter (TTY) users

TTY users can call 1-800-665-0354 for bilingual assistance during regular business hours.

Our service complaint process

Step 1 – Talk to us

If you are not satisfied with the service that you have received from us, you can make a formal complaint. Before you do this, we recommend that you try to resolve the matter with the CRA employee you have been dealing with or call the telephone number that you have been given.

If you are not pleased with the way your concerns are addressed, you can ask to discuss the matter with the employee's supervisor.

Step 2 – Contact CRA – Service Complaints

The CRA – Service Complaints program is available to individual and business taxpayers as well as benefit recipients. This program gives you another level of review if you are not pleased with the results from the first step of our complaint process. Generally, service-related complaints refer to the quality and timeliness of the work that we performed.

To bring your complaint to the attention of CRA – Service Complaints, complete Form RC193, Service Related Complaint, which you can get by going to Service Complaints or by calling 1-800-959-8281 .

Step 3 – Contact the Taxpayers' Ombudsman

If, after following steps 1 and 2, you are still not satisfied with our service, you can file a complaint with the Office of the Taxpayers' Ombudsman.

For information about the Taxpayers' Ombudsman and how to file a complaint, please visit Taxpayers' Ombudsman.

Your opinion counts!

If you have comments or suggestions that could help us improve our publications, send them to:

Taxpayer Services Directorate
Canada Revenue Agency
395 Terminal Avenue
Ottawa ON K1A 0L5


Index

In addition to listing topics, this index provides references to any Interpretation Bulletin (IT) and Information Circular (IC) related to each topic mentioned. If after reading the explanations provided in this guide, you still need more information, get a copy of these publications. We provide a complete list of references.

A

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