Canada Customs and Revenue Agency qualify a capital gain as being the profit made on the disposal of a property or an asset by an individual or a partnership or a corporation. A capital spending occur when the expense is made once for good or when it is made to generate another good or gave a long term input to the business income.
In general, the profits made on the disposal of a property or capital asset is taxable at in inclusion rate of 50% and this inclusion portion is taxable at your personal tax rate. Over and above the capital gain is taxable at a rate rounding 28%. In decreasing the inclusion rate the Agency wanted to get close to the IRS rate (Internal Revenue Service department of Treasury USA) on this type of income.
Here are the major criterions used par Canada Customs and Revenue Agency to qualify if an income is a business income or a capital gain:
- Nature of the property
- Ownership period
- The number and the frequency of transactions
- Taxpayer conduct
- Circumstances around the transaction
- Taxpayer intention (primary and secondary)
- Commercial background and previous experience of the taxpayer in a similar commercial nature
- fragmentation (land subdivision or the sale in undivided units (condominium) of a building)
Here are the tax exempt items: the qualified small business corporation shares, the farms property, and the principal residence.
Principal Residence rules
In order for a property to qualify for a taxpayer principal residence, the individual must own the property. Joint ownership with another person qualifies for this purpose. The housing unit must be inhabited by the taxpayer or by his or her spouse, former spouse or child.
An individual can designate only one property as his or her principal residence. Only one property per family unit can be designated as a principal residence after the year 1981.
If the land on which the housing unit is situated is not in excess of one-half hectare, it usually qualifies as part of the taxpayer’s principal residence
The capital gain is determined in proportion of the number or years ending after the acquisition date which the property was the individual principal residence on the total numbers of years after the acquisition date which the taxpayer owned the property.
Qualify as a principal residence: a house, an apartment or a unit in a duplex, a condominium, a cottage, a mobile home, a trailer, a houseboat.
If you have a home office do not claim the Capital cost allowance on the business part of your house in order to not make a partial change in use of your property form a principal residence to an income-producing.
(References: ITA 54, 40(2)b) and c), 40(2)g)ii), 13(7), it-120R5, it-459)