Chapter 8

Gains and Losses on the Disposition of Capital Property

Capital Gain versus Business Income

 Business Income
o Property acquired for the purpose of resale at a profit is
classified as inventory.
 Its disposition results in business income or a
business loss
 Capital Gain
o Property acquired for the purpose of providing the
owner with a long-term or enduring benefit is classified
as capital property
 Its disposition results in a capital gain or loss
 Factors to determine Capital Gain vs. Business Income
o Intention, and other factors below, are not ranked, as
the importance of each depends on the relative
strength and weakness of the others in a particular case
o Period of ownership 
 That a property is held for a long period of time
substantiates the claim that it is capital property
which was purchased to provide a long-term and
enduring benefit.
 That a property is held for a short period of time
speaks against such a claim, in that it is evidence
that the property may have been purchased for
resale.
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Capital versus Business Income (continued)
 Intention (continued)
o Nature of the transaction 
 The courts will examine the entity's course of
conduct over the ownership of the property,
dwelling on the point of acquisition, the use of the
property during its ownership, and the reasons for
and nature of its disposition
 Example 1:
 The sale of raw land, even when it is held for a
period of 15 years, may be regarded as
business income if the owner cannot provide
evidence of enduring benefit through rental or
personal use and enjoyment.
 Example 2:
 On the other hand, an individual who
purchased vacation land with the intention of
building a summer cottage but sold the raw
land for a profit after a brief ownership period
may be considered to have achieved a capital
gain if the reason for the sale was that the
original intention was frustrated by a sudden
need for money, an inability to finance the
cottage, a job transfer, or the like.

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Capital versus Business Income (continued)
 Intention (continued)
o Number and frequency of transactions 
 A historical pattern of frequent buying and selling
supports the premise that the intended purpose of
acquisition was to resell at a profit.
 The frequent acquisition and sale of rental real
estate properties may be considered as resulting in
business income even though those properties
were held for a respectable time period and
reasonable rental profits were achieved

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Determining Capital Gains and Losses - Deferred Proceeds
 The maximum reserve that can be claimed in any one year is
restricted to the LESSER of:
1)
Outstanding Proceeds
--------------------------- X Capital Gain =
Total Proceeds
Or

2) 1/5 of Capital Gain X (4 – n) N= # of years since property

was sold (N in the 1st year = 0)
Example: Pierre bought a property for 130,000 in 2015 and sold
the property in 2021 for $200,000. The selling price of $200,000
is to be paid as follows:
• 2021 = $80,000, 2022 = $30,000, 2023 = $0, 2024 =
$90,000
 Capital Gain of $70,000 but I only received $80,000 this
year

The first year (2021) Capital gains reserve (LESSER OF)

120,000
---------- X 70,000 = $42,000
200,000
or
1/5 of $70,000 = $14,000 X (4 - 0) = $56,000
 $70,000 Capital Gain - $42,000 (Reserve) = $28,000 Gain
or $14,000 taxable capital gain added to income in 2021.

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 The 2ND year (2022) Capital gains reserve (LESSER OF)

90,000
---------- X 70,000 = $31,500
200,000

or

1/5 of $70,000 = 14,000 X (4 – 1 = 3) = $42,000

$70,000 Capital Gain - $31,500 (Reserve) = $38,500 capital gain

will be added to income.

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Determining Capital Gains and Losses — Deferred Proceeds
(continued)
 Farming / Fishing
o It should be noted that the time limit of five years is
extended to 10 years when the sale is made to a child of
the taxpayer and the property sold is shares of a small
business corporation, farm property, or an interest in a
family farm partnership.
o The maximum reserve that can be claimed in any one
year is restricted to the LESSER of:

Outstanding Proceeds
---------------------------X Capital Gain
Total Proceeds

&

1/10 of Capital Gain X (9 – n)