Chap 11

Question 1

2 ways for CRA to collect taxes on disposition of capital property

Answer 1

Deemed disposition

Income attribution

Question 2

Deemed Disposition of Asset (definition)

Answer 2

Under specific circumstances, assets are deemed to have been disposed of, usually at fair market value even if it has not actually been disposed of

Question 3

Income Attribution

Answer 3

Income earned on an asset transferred is attributed back on the transferor

Question 4

4 cases where deemed disposition is used

Answer 4

1) Intervivo gifts/ transfer
2) day of the death of the tax payer
3) Change of use from personal to income producing and vice versa
4) Emigrating

Question 5

Capital asset

Answer 5

Provides long term benefit by producing either business income or property income

Question 6

Adjusted Cost Base (ACB)

Answer 6

+Original Cost +Acquisition cost +/- Share of partnership profit/loss + non deductible cost incurred + Ellection made on the $100,000 lifetime capital gain exemption +superficial losses from the purchase +interest and property tax on land +discount on a bond if included in income - Gov grant or subsidies

Question 7

3 types of capital loss

Answer 7

loss on capital asset
“personal use property”
“listed personal property”

Question 8

Capital Gain/Loss against Personal Use Property

Answer 8

Capital gains are taxed but capital losses can not be deducted. Personal Use Property include cottages, Grand Piano and Antiques

Question 9

$1000 floor rule (disposition of asset)

Answer 9

Deemed ACB/ Deemed proceeds is the greater of:

• Actual ACB/ Proceeds
• $1000

Question 10

Listed Personal Property (LPP)

Answer 10

Includes prints, etching, drawings, paintings, sculptures and similar works of art, rare books, jewellery, rare folios, rare manuscripts, stamps and coins. Can have Capital Gain or Capital Loss

Question 11

Capital gain/losses on Listed Personal Property

Answer 11

1000$ rule apply, then capital losses can be applied against capital gain from other Listed Personal Property

Question 12

Principal Residence Exemption

Answer 12

Provides tax exemption on the capital gain on the principal residence. (# years designated as principal residence since 1971 +1)/# year owned since 1971

Question 13

Non depreciable Capital property

Answer 13

Include assets that earn income and do not depreciate or wear out. for example, stock

Question 14

Depreciable Capital Property

Answer 14

income producing property > Capital Cost can be deducted over the years as a business expense using Capital Cost Allowance. Depreciable Capital Property can generate capital gain, recapture or Terminal Loss

Question 15

Capital Cost

Answer 15

Very similar to ACB. It is the acquisition cost of the asset which is used as the basis for CCA

Question 16

Capital Cost Allowance

Answer 16

Tax deduction permitted on a class of decipherable capital asset.

Question 17

Undepreciated Capital Cost

Answer 17

Capital Cost - CCA

Question 18

Capital Gain on depreciable capital property

Answer 18

when the asset is sold at a price higher that the capital cost. The $ over Capital Cost is capital gain and is taxed accordingly. What is left can be taken out of the UCC pool

Question 19

Recapture / Terminal Loss

Answer 19

Selling price =< CA is taken out of the UCC pool. If selling price < UCC, there is a terminal loss if the asset sold is the last in the class, If selling price >UCC, selling price - UCC = Recapture

Question 20

Capital loss

Answer 20

Occurs only with non depreciable assets. All assets owned for personal use are non depreciable

Question 21

Sale of land and building

Answer 21

If the sale of one result in a capital gain and the other in a terminal loss, proceeds are redestributed to reduce or eliminate the terminal loss and reduce the capital gain. The result is an increase in taxable income

Question 22

Renting the principal residence

Answer 22

Taxpayer can move out of their principal residence and rent it out for up to 4 years as long as:

• remain in Canada
• Does not designate another residence as their principal residence
• file a “no change of use” with the CRA
• Does not claim any CCA on the residence while rented out

Question 23

Principal residence of a farm (2 methods for calculating capital gain)

Answer 23

1) Deduct 1000 from total capital gain for each year after 1971
2) only 1/2 hectare is deemed to be part of the principal residence

Question 24

Intangible Asset

Answer 24

Franchise and licence, goodwill, incorporation or reorganization cost, consumer list, trademark, patent and patent right, milk quota, government rights

Question 25

Depreciable property > Intangible assets

Answer 25

Intangible assets that have a limited life, including franchise, patent, consession and licence, are depreciable property: Eligible capital property

Question 26

Eligible Capital Property

Answer 26

a class of depreciable intangible assets. The cost is Eligible Capital Expenditure, the undepreciated portion at any given time is Cumulative Eligible Capital (equivalent of UCC). Only 75% of the cost enters the class when the asset is bought. No half year rule

Question 27

Spousal rollover

Answer 27

A person can transfer asset to a spouse (or dependant child or grandchild) with no tax implication on capital gain. Income attribution rule still applies

Question 28

Non arm’s lenght person

Answer 28

Related person connected by blood, marriage or adoption

Question 29

4 cases when income attribution stops

Answer 29

1) taxpayer ceases to be Canadian resident
2) taxpayer or designed person dies
3) related minor turns 18
4) marriage breaks down

Question 30

Income attribution rule

Answer 30

Applies to: income form lone at low or no interest, transfer or gifts at less than FMV, substituted property, transfer or loned property using trust, loans and transfer to a trust

Question 31

Kiddie tax

Answer 31

Income tax on div paid from a private company to a minor child are taxed at the highest fed tax rate and the only tax credit permitted is the div tax credit ( not even basic personal amount)

Question 32

Deemed disposition of assets at death

Answer 32

At death there is a deemed disposition of all assets. generaly, POD =FMV except when transferred to spouse, child or grandchildren. In that case, spousal rollover rules apply and assets are deemed to be transferred with no tax implications

Question 33

Net capital gain at death

Answer 33

Capital gain are reported on the final tax return. Certain capital property is eligible for the principal residence exemption and p/or the lifetime capital gain exemption of 800000$

Question 34

Net capital loss at death

Answer 34

Net capital loss carryforward at death is applied to

1) net capital gain in the year of death
2) any other source of income in the year of death and the year before

Question 35

3 optional final tax return

Answer 35

1) “rights or things”
2) “ a partner or proprietor “
3) “income from a testamentary trust

Question 36

What is the total income on the final tax return

Answer 36

• all income received before death
• all income from deemed disposition
• all periodic payment (rent…)

Question 37

Final tax return/ total income in the return for right and things

Answer 37

• salary, commission, vacation pay
• retroactive salary adjustment
• CPP &EI arrears
• account receivable, supply and inventory
• uncashed bond coupon and interest earned
• dividend declared before the date of death
• crops and livestock
• work in progress

Question 38

Final tax return / total income in return for partner or proprietor

Answer 38

Income from a buisness from the end of the business fiscal period to the date of death

Question 39

Final tax return/ total income on return from interest and testamentary trust

Answer 39

Income from the trust, from the end of the trust’s fiscal period to the date of death

Question 40

Amounts that cannot be claimed on an optional final return

Answer 40

• RPP Deduction
• RRSP deductions
• annual unions, professional or like dues
• child care expense
• Support payments made
• amounts transfered from a spouse or common law partner

Question 41

Capital Gain Exemption (final return)

Answer 41

Up to 800,000 of capital gain or 400,000 of taxable capital gain is exempt from tax on qualified farm and fishing property and shares in a qualified small business corporation

Question 42

Final tax return/ capital gain exemption/ qualified small business

Answer 42

Must be a Canadian-controlled private corporation:

• more than 90% of assets are used in active business carried in Canada
• owned by the taxpayer, spouse or related party
• during the last 24 month: was not owned by a different person & more than 50% of assets were used in Canada

Question 43

Final tax return/ capital gain exemption/ qualified farm property

Answer 43

Property owned by individual or spouse were farming is the primary source of revenue. Must have been used for farming in the year of death + 5 years during the time family owned it. Gross revenue from the farm are larger than income from other sources

Question 44

Final tax return/ capital gain exemption/qualified fishing property

Answer 44

It includes real property, fishing vessel, and eligible capital property that has been used principally in a fishing business carried on in Canada.

Question 45

Final return/ estate freezes

Answer 45

Minimizes taxes on deemed disposition at death by passing title to the asset at some time before death. Leads to capital gain at the time of the freeze and income attribution rule still applies

Question 46

Inclusion rate

Answer 46

Taxable portion of capital gain