Capital Gains Tax: When It Applies and How It Is Reported

Events the CRA treats as selling

A disposition is any event where you give up the property, or are considered to. Besides an ordinary sale, the CRA lists these among the cases where you may be treated as having sold capital property:

• you swap one property for another, or give property other than cash as a gift;
• shares or other securities in your name are converted, or a corporation redeems or cancels them;
• the property is stolen, destroyed or expropriated, or an option you hold to buy or sell it expires;
• you change the use of all or part of it, such as renting out part of your home or moving into a former rental;
• you leave Canada, or the owner dies.

A change in use is treated as selling at fair market value and buying straight back at the same price, so tax can be due in a year with no cash coming in. Gifts to a spouse or common-law partner are the main exception: they generally move across at your cost, with no gain or loss until your partner disposes of the property.

Getting the cost right

The gain is measured from the adjusted cost base, and errors there are the commonest source of a wrong figure. Shares or fund units bought in several lots don't keep separate costs: each purchase is folded into an average, recalculated every time you buy more. Property you were given is treated as acquired at its fair market value on the day you received it. Inherited property usually starts at the value the deceased person was deemed to have sold it for, normally its fair market value just before death. Sales of securities are usually reported to you on a T5008 slip or an account statement, which is where most people find the proceeds.

Losses come with limits

A capital loss works only against capital gains. Half of it, the allowable capital loss, is netted against taxable capital gains in the same year; anything left over becomes a net capital loss that can be carried back to any of the three previous years or forward indefinitely, but never used against salary or pension income.

Three rules shrink or block losses:

• Superficial losses. Sell at a loss and buy the same or identical property within 30 calendar days before or after, still holding it 30 days after the sale, and the loss is denied. Purchases by an affiliated person such as your spouse or partner, or a corporation either of you controls, count too.
• Personal-use property. Cars, boats, furniture and similar items rarely produce a usable loss: a loss on personal-use property can't be deducted. Both the cost and the proceeds are treated as at least $1,000, and if both are $1,000 or less nothing is reported.
• Listed personal property. Art, jewellery, rare books, stamps and coins are the exception. Their losses can be used, but only against gains on the same kind of property, and an unused loss expires at the end of the seventh year after it arose.

Gains paid over several years

When the buyer pays you in instalments, you don't have to include the whole gain in the year of sale. A capital gains reserve defers the part you haven't yet been paid, but most reserves run for no more than four years after the sale, so the full gain is in income within five years. A ten-year spread is available in some cases, such as transferring family farm or fishing property to your child. Reserves are claimed on Form T2017.

Reporting the gain

Federally, every disposition goes on Schedule 3, which arrives at the taxable capital gain for line 12700 or at a net capital loss to carry elsewhere. Amounts in a foreign currency are converted to Canadian dollars at the exchange rate in effect on the day of each transaction. In Quebec the provincial return has its own schedule, Schedule G, feeding line 139. For what the gain then costs in tax at your income and in your province, use the capital gains tax calculator.