What tax rules apply when disposing of a capital property? To answer the question, we should first address what is considered a capital property as per the CRA. In Canada, common types of capital property include cottages, buildings, land, equipment to operate businesses, and securities such as bonds or stocks. In general, capital property consists of depreciable property – which refers to those used to earn income for a business, or whose cost can be annulled by Capital Cost Allowance (CCA), such as equipment – and property that results in a capital gain or loss at its disposition, such as land or securities. While the formal type of capital property is bought to rev up business income, the latter pivots to purpose of investment.
As for capital gain or loss, either is likely to be incurred by disposition of eligible assets. That is, when you sell a capital property at a price higher than its Adjusted Cost Base , the disposition incurs a capital gain. Likewise, if you sell the same property at a price lower than its adjusted cost base, a capital loss occurs. ACB means the general cost of a property plus the expenses to acquire it, e.g. commission to agents when acquiring a land. For more information concerning calculating capital gains or losses, carrying a loss back or forward, and deduction, click here for a recap.
While you cannot deduct the full cost of a depreciable property in the year of acquisition, you can do so using CCA over an extended period of several years. Please note that such depreciable properties are categorized into different CCA rates, whereby claims are calculated.
In addition, there is hypothetical disposition for tax purposes, otherwise known as deemed disposition. It refers to a disposition of a property prior to sale. Often applied to a deceased person, deemed disposition allows the CRA to calculate the capital property of a diseased person into their capital gain or loss. When a person passes away, the CRA presumes that the person has disposed of all his capital assets.