Capital Gainsand Losses

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Abbreviations used in this guideACB: Adjusted cost baseCCA: Capital cost allowanceCCPC: Canadian-controlled private corporationCRA: Canada Revenue AgencyFMV: Fair market valueUCC: Undepreciated capital cost

Contents

Chapter 1 – General information ........................................................................................................................... 4

Chapter 2 – Capital gain or loss ............................................................................................................................. 5

A. Calculating a capital gain or loss .................................................................................................... 5

B. Reporting a capital gain or loss ...................................................................................................... 8

C. Failure to report a capital gain or to file an income tax return ......................................................... 8

Chapter 3 – Taxation of capital gains .................................................................................................................... 9

Chapter 4 – Tax treatment of various types of property ....................................................................................... 10

A. Immovable property ..................................................................................................................... 10

B. Depreciable property .................................................................................................................... 10

C. Securities and other property ........................................................................................................ 11

D. Personal-use property .................................................................................................................. 12

E. Principal residence ....................................................................................................................... 13

F. Cultural property .......................................................................................................................... 15

G. Intangible capital property ............................................................................................................ 15

Chapter 5 – Reserves ........................................................................................................................................... 18

A. Calculating a reserve .................................................................................................................... 18

B. Reserve claimed by a member of a partnership ............................................................................. 18

Chapter 6 – Special cases .................................................................................................................................... 20

A. Transfer of property between persons not dealing at arm’s length ................................................. 20

B. Disposition of property and acquisition of replacement property .................................................... 22

C. Disposition and acquisition of eligible small business corporation shares ....................................... 22

D. Gifts to a charity or other qualified donee ..................................................................................... 23

E. Change of use .............................................................................................................................. 25

F. Emigration ................................................................................................................................... 25

G. Disposition of property by a partnership ........................................................................................ 25

Chapter 7 – Capital gains exemption ................................................................................................................... 26

A. $500,000 exemption.................................................................................................................... 26

B. Capital gains exemption respecting resource property ................................................................... 27

Chapter 8 – Deduction of capital losses ............................................................................................................... 28

A. Deductibility ................................................................................................................................. 28

B. Applying the deduction ................................................................................................................ 30

Chapter 9 – Business investment losses ............................................................................................................... 31

4

Chapter 1

General informationA disposition of property may result in a capital gain (or loss),only a portion of which is taxable (or deductible), or in businessincome (or a business loss), which is fully taxable (or deductible).

In order for a disposition of property to result in business income(or a business loss), the disposition must be a business transac-tion. This would be the case, for example, where a personregularly buys and sells buildings for profit. However, where aperson sells a building that was acquired and used for personalpurposes or in order to earn rental income, the sale is consid-ered a capital transaction, and may result in a capital gain or acapital loss.

Principal changesCapital gains rollover on small businesscorporation shares

You may defer the taxation of the capital gain realized upon thedisposition of small business corporation shares (known as“original shares”) if you acquired other small business corpora-tion shares (known as “replacement shares”) and if certainother conditions, related to the adjusted cost base (ACB) limitfor original shares and the allowable cost limit for replacementshares, are met. For any dispositions made after February 18,2003, the limits have been abolished, and the replacementshares must have been acquired during the year in which thedisposition of the original shares occurred, or within 120 daysof the end of that year.

Abolition of the capital gains exemptionwith respect to resource property

The exemption has been abolished with respect to capital gainsrealized on flow-through shares issued after June 12, 2003,unless the shares were issued further to an investment made nolater than that date or further to an application for a receipt fora final prospectus (or for an exemption from filing a prospectus)made no later than that date. Accordingly, you may no longertake into account the expenses related to these shares incalculating the limit with respect to exploration expenses in-curred in Québec (which is one of the elements used to determinethe amount of the exemption).

This guide is intended generally for individuals who disposedof capital property or intangible capital property in the taxationyear and individuals who are members of a partnership thatdisposed of such property in the course of its fiscal period. Thisversion of the guide is valid as of 2003, and will continue toapply until fiscal or administrative changes make an updatenecessary.

Capital property is depreciable property, or non-depreciableproperty whose disposition results in a capital gain (or loss).

Capital property may be depreciable property of a prescribedclass that is used to earn income (e.g., buildings, furniture,equipment or machinery), or non-depreciable property that isused to earn income or for other purposes (e.g., shares, bonds,debts or immovables). In this guide, we frequently use theterm “property” to designate capital property.

Intangible capital property is incorporeal property used incarrying on a business. Three-quarters of the cost of anintangible property may give rise to a 7% deduction in thecalculation of income earned from the business.

As a rule, a disposition of property is a transaction in which aperson disposes of property for a consideration (that is, sells theproperty) or donates property. The term “transfer” is sometimesused where the parties to the transaction are not dealing atarm’s length (see Chapter 6, section A).

A disposition may be involuntary when property is expropri-ated, damaged, stolen, destroyed, etc.

In certain cases, a deemed disposition of property is said tooccur, for instance where• an individual determines that a debt is uncollectible (see “Bad

debts,” in section C of Chapter 4 dealing with securities andother property);

• there is a change in the use of property (see Chapter 6,section E);

• the owner of the property emigrates from Canada (see Chap-ter 6, section F);

• the owner of the property dies (see the Guide to Filing theIncome Tax Return of a Deceased Person (IN-117-V)).

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Chapter 2

Capital gain or loss

The FMV is the highest price that could be obtained on anopen market for a property, where the buyer and sellerconsent to the transaction, are well-informed and are deal-ing at arm’s length.

Adjusted cost base

The ACB is generally the acquisition cost of the property, plusthe expenses incurred to acquire it (such as legal fees,surveying and assessment costs, brokerage fees, deliveryand installation costs, and any GST or QST payable) and thecost of any additions (i.e., capital expenditures respectingadditions or improvements made to the property).

For depreciable property, the ACB is the capital cost of theproperty. For other property, the ACB may have to be adjusted.

Property acquired as a gift or an inheritance,or through a transferIn order to calculate the capital gain or loss you realize on thedisposition of property, you must first determine the cost atwhich you acquired the property. In some cases, the acquisi-tion cost for this purpose may differ from your actual acquisitioncost. This is the case where, for example, you acquired theproperty as a gift or an inheritance, or the property wastransferred to you by a person with whom you were not dealingat arm’s length, for consideration higher than the FMV at thetime of the transfer. In these cases, the acquisition cost isdeemed to be equal to its FMV at the time of the gift or transfer,or immediately preceding the death (as applicable). However,this rule does not apply in the following cases:• You received the property from your spouse (or former spouse,

in settlement of a right resulting from the marriage), and youand your spouse or former spouse were resident in Canada atthe time of the gift or transfer, except where your spouse orformer spouse made an election to have the FMV of theproperty considered to be his or her proceeds of dispositionand your acquisition cost.

• You received the property further to the death of your spouseand you and your spouse were resident in Canada immedi-ately before the time of death, except where the deceased’slegal representative makes an election whereby the FMV ofthe property is considered to be the deceased’s proceeds ofdisposition and your acquisition cost.

Property respecting which an election was madeon February 22, 1994The acquisition cost of property may also differ from its actualacquisition cost if you completed form TP-726.18-V, Election to

This chapter explains how to calculate the capital gain (or loss)that you, as transferor, realize when you dispose of prop-erty, and will help you determine the year in which you arerequired to report the gain or loss.

It is important to note that you are not required to report acapital gain on personal-use property unless the proceeds ofdisposition are over $1,000. You cannot deduct a capital losson such property unless it is considered precious property (seeChapter 4, section D). Precious property comprises personal-use property such as prints, etchings, drawings, paintings,sculptures and other similar works of art, as well as jewellery,stamps and coins, and rare folios, books and manuscripts.

Moreover, you are not required to report a capital gain realizedon the disposition (by sale or donation) of cultural property toa prescribed institution or authority, a certified archival centreor an accredited museum (see Chapter 4, section F).

A. Calculating a capital gain or lossTo calculate the capital gain or loss on a disposition of capitalproperty, use the formula A – (B + C), whereA is the proceeds of disposition of the property,B is the adjusted cost base (ACB) of the property, andC is the amount of the expenses incurred to dispose of the

property.

Proceeds of disposition

Any one of the following amounts may be referred to asproceeds of disposition:• the selling price of the property;• the amount deemed to be the proceeds of disposition. This

amount generally corresponds to the fair market value(FMV) of the property at the time of the deemed disposition(for example, immediately before the owner’s death oremigration from Canada), or at the time of the transfer(e.g., when an inter vivos gift is made or when the propertyis transferred to a person with whom the transferor is notdealing at arm’s length, for consideration that is less thanthe FMV). The amount sometimes equals zero (as in thecase of a debt that became uncollectible during the year ora share of the capital stock of a corporation that wentbankrupt or became insolvent during the year);

• the amount of compensation received for property thatwas expropriated, destroyed, damaged or stolen.

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Property used in part to earn incomeIf part of the property has always been used to earn income, thecost of the property and its proceeds of disposition must bedetermined according to the percentage of use for the purposesof earning income.

Example

You purchased equipment in 2001 for $20,000, and sold itin 2003 for $12,000. While you owned the property, youused it in part (and on a regular basis) to earn businessincome and in part for other purposes. The percentage ofbusiness use was 40%.

The capital cost of the property is therefore only $8,000(40% of $20,000), and your annual capital cost allowance(CCA) is based on this amount.

For the purpose of calculating the capital gain or terminalloss (there can be no capital loss on depreciable property) for2003 on the income-producing portion of the property, theproceeds of disposition are $4,800 (40% of $12,000). Theproceeds of disposition for the portion of the property notused to earn income are $7,200 (60% of $12,000). There canbe no capital loss on the portion of the property not used toearn income.

Disposition of part of a propertyIf only part of a property is disposed of, the ACB of this portionis equal to the ACB of the entire property, multiplied by thefraction of the property that is disposed of. For example, if 1/5of the value of a property is disposed of, the ACB of the portiondisposed of is equal to the total ACB multiplied by 1/5.

Securities acquired under a stock optiongranted as part of your employmentIf you disposed of shares that you acquired under an agreementthat constitutes a stock option granted by your employer (or bythe employer of a person who transferred the stock option rightsto you in a non-arm’s-length transaction), or by a corporationthat was not dealing at arm’s length with such an employer, youmust calculate your capital gain (or loss) as if the ACB of theshares were equal to the total of the following amounts:• the cost of the shares (any amount paid or payable to acquire

the shares as well as any amount paid to acquire the option);and

• the taxable benefit resulting from the option granted.

If you disposed of units of a mutual fund trust, the value of thetaxable benefit must also be added to the actual cost of theunits, provided the option was granted after February 1998 byyour employer (or by the employer of a person with whom youwere not dealing at arm’s length), or by a mutual fund trust withwhich such an employer was not dealing at arm’s length.

Report a Capital Gain Deemed to Have Been Realized. In thiscase, you are deemed to have disposed of the property onFebruary 22, 1994, for an amount equal to the designatedproceeds of disposition, and to have reacquired it immediatelythereafter (on February 23, 1994) for the same amount.

The exceptions to this rule are as follows:• If the property is non-qualifying immovable property

(such as a cottage or rental property), its acquisition coston February 23, 1994, is equal to the designated proceedsof disposition minus the reduction for non-qualifyingimmovable property. The reduction, which must be calculatedwhen the election is made, is explained in the guide CapitalGain Deemed to Have Been Realized (TP-726.18.G-V). How-ever, if you or your spouse made an election on formTP-726.18-V with respect to non-qualifying immovable prop-erty that was designated as your principal residence at thetime of the election or at the time of its disposition, theproperty is not deemed to have been disposed of on February22, 1994, nor to have been reacquired immediately thereaf-ter; consequently, the ACB of the property must not beadjusted. The reduction for non-qualifying immovable prop-erty will be determined once a disposition or deemeddisposition of the property has taken place. This reduction iscalculated on form TP-274.S-V, Reduction of the Capital GainDeemed to Have Been Realized on a Principal Residence, andis taken into account in the calculation of the capital gainrealized or deemed to have been realized at that time.

• If the property is a security (unit, interest or share) held in aflow-through entity (see definition in Chapter 7), the acqui-sition cost on February 23, 1994, is equal to the ACB (calculatedin the usual way), and is not affected by the election. How-ever, in such cases an “exempt capital gains balance” iscreated. You can use this balance to reduce capital gains thatare subsequently allocated to you by the flow-through entity,or that result from the disposition of a portion of the property.However, if the exempt capital gains balance is not com-pletely used up when the property (or the residual portionthereof) is disposed of, the unused amount can be used toincrease the ACB of the property (or of the residual portionthereof). For further information, see form TP-726.7.S-V,Exempt Capital Gains Balance.

In addition, if the proceeds of disposition designated on formTP-726.18-V exceed the FMV of the property on Febru-ary 22, 1994, it is possible that the acquisition cost will bereduced. In the case of a principal residence, the reductionwill be determined once a disposition or deemed dispositionof the property has taken place. The reduction is calculated onform TP-274.S-V, and is taken into account in the calculationof the capital gain realized or deemed to have been realized.

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As a rule, the taxable benefit referred to above is the benefitindicated as a “security option” on the employee’s RL-1 slip.The value of the benefit must be included in the employee’sincome• for the year in which the option is exercised, even if it is

exercised by a person to whom the employee transferred theoption rights in a non-arm’s-length transaction; or

• for the year in which the employee disposes of or ex-changes securities acquired under the option (see note below)if– the option agreement was concluded with the employer

that is a Canadian-controlled private corporation (CCPC),or with a CCPC related to the employer, and the employeewas dealing at arm’s length with the corporation (or cor-porations) immediately after the option was granted; or

– the option is exercised after February 27, 2000, the securi-ties are shares of a corporation (other than a CCPC) orunits of a mutual fund trust, and the employee has filed avalid election with the Canada Revenue Agency (CRA) todefer taxation of the benefit.

Where the employee dies before the option is exercised, thebenefit is indicated on his or her RL-1 slip for the year of deathand must be included in income for that year. If the option rightswere transferred before death to a person not dealing at arm’slength with the employee, as a rule, that person must report thebenefit for the year he or she exercises the option.

An employee required to report a benefit respecting an optionmay also claim a deduction in this regard if a note to this effectappears in the centre of the RL-1 slip. Another deduction maybe claimed if the securities in question are shares listed on aprescribed stock exchange or units of a mutual fund trust, thatwere donated to a qualified donee other than a private founda-tion. For further information, contact the Ministère.

NOTE: This does not include an eligible exchange of securi-ties, since in that case the employee is deemed not to havedisposed of securities or acquired new securities, and thenewly acquired securities are deemed to be the same as, anda continuation of, the securities being disposed of, provided• the securities (new and old) were issued by the same

issuer (or the two issuers were not dealing at arm’s lengthimmediately following the exchange),

• the employee received only the new securities in exchangefor the old securities, and

• the value of the new securities does not exceed the valueof the old securities.

Identical propertiesIf the property disposed of belongs to a group of identicalproperties that were acquired at different prices, its ACB isequal to the average ACB of the properties.

Example 1

In 2003, you disposed of 80 shares that belonged to a groupof identical properties (240 common shares of a particularcorporation). The chart below shows your transactions withrespect to the identical properties.

Number Cost Totalof shares per share ACB

Purchase in 2001 100) $15 $1,500Purchase in 2001 50) $24 $1,200

150) $2,700

Average ACB:$2,700 150 = $18

Disposition in 2002 (80) $18 ($1,440)

70) $1,260Purchase in 2002 170) $30 $5,100

240) $6,360Average ACB:$6,360 240 = $26.50

Disposition in 2003 (80) $26.50 ($2,120)

160) $4,240

With each new acquisition (purchase) of shares, you mustrecalculate the average ACB of the identical properties. When adisposition (sale) takes place, you must use the average ACB tocalculate your capital gain or loss. In this example, the 80 sharesdisposed of in 2003 have an ACB of $26.50 each, for a total ACBof $2,120.

Example 2

You disposed of 1,000 units of a mutual fund trust. The unitsbelong to the same class and are considered identical prop-erties. You must calculate their ACB as shown below.

Number Cost Totalof units per unit ACB

Purchase in 2001 1,200) $6.55 $7,860Income and capital gainsin 2001, paid in the formof additional units 90) $7.22 $650

1,290) $8,510

Average ACB:$8,510 1,290 = $6.60

New purchase in 2002 500) $7.40 $3,700Income in 2002, paid in theform of additional units 120) $7.46 $895

1,910) $13,105

Average ACB:$13,105 1,910 = $6.86

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Disposition in 2003 (1,000) $6.86 ($6,860)

910) $6,245

The ACB of the 1,000 units sold in 2003 is therefore $6,860.

NOTE: In the following circumstances, where you dispose ofa particular security that is identical to other securities youpossess, the particular security is deemed not to be identicalto the other securities, and the rule respecting the averageACB does not apply to the calculation of the capital gain (orloss) resulting from the disposition:• You acquired the particular security after February 27,

2000, under an option agreement granted as part of youremployment and (as applicable)– the taxation of the benefit resulting from the option is

deferred to the year in which the security is disposedof or exchanged;

– within 30 days of the acquisition, you disposed of anidentical security. The particular security acquired isthen deemed to have been disposed of and not to beidentical to another security, provided you designateit in your income tax return as the security disposed ofand do not make a similar designation with respect tothe same security for another disposition. Moreover,from the time of acquisition to the time of disposition,you must neither acquire nor dispose of another iden-tical security.

• The particular security is a share that you, as the benefi-ciary of a deferred profit-sharing plan (DPSP), receivedas part of a single payment upon your withdrawal fromthe plan or retirement from employment, or on the deathof an employee or former employee, provided a validelection has been made with the CRA under subsection147(10.1) of the Income Tax Act (R.S.C. 1985, c. 1 (5thSupp)).

Shares received further to a demutualizationIf, further to the demutualization of an insurance corporation,you received a benefit consisting in shares of the capital stockof the insurance corporation or of a holding company, you arenot required to include the amount of the benefit in your incomefor the year in which you received the benefit. However, you aredeemed to have acquired the shares at a cost of zero, and youwill therefore have a capital gain when you dispose of them.

B. Reporting a capital gain or lossDispositions of capital property must be reported in the calen-dar year in which they occur. This applies to all categories ofcapital property, whether personal-use property, property usedto generate property income, or property used in a business(regardless of the end-date of the business’s fiscal period).

However, if you are a member of a partnership that disposed ofcapital property, you must report the disposition in accordancewith the fiscal period of the partnership. For example, if thepartnership’s fiscal period began on July 1, 2002, and ended onJune 30, 2003, you must report your share of the gains (orlosses) in your 2003 income tax return even if the dispositionoccurred between June 30, 2002, and January 1, 2003.

To report your capital gains (or losses) for the year, completeSchedule G of the income tax return.

C. Failure to report a capital gainor to file an income tax return

The taxable capital gain for a given year is made up of thefollowing amounts:• the net amount of the taxable capital gains and allowable

capital losses resulting from dispositions of property duringthe year;

• the reserve deducted for the previous year (see Chapter 5).

A taxable capital gain related to certain types of property maygive entitlement to a capital gains exemption (see Chapter 7).However, if the person who disposes of the property knowingly,or under circumstances constituting gross negligence,• fails to report the capital gain in his or her income tax return

for the year in which the gain was realized, or• fails to file an income tax return for that year within one year

after the filing deadline (in the case of the 2001 income taxreturn, by April 30, 2003, or June 15, 2003, as applicable),

he or she will not be entitled to the exemption, either for theyear in which the gain was realized or for a subsequent year.

9

Chapter 3

Taxation of capital gainsBefore you carry this amount to Schedule G, we recommend thatyou use form TP-231-V, Capital Gain Resulting from the Dona-tion of Certain Property, to calculate the adjusted amount ofsuch gains. For further information, see “Ecological gifts andgifts of certain securities” in section D of Chapter 6.

Capital gains exemptionA capital gains exemption of $500,000 may be claimed withregard to• capital gains realized on the disposition of qualified farm

property, qualified fishing property and qualified smallbusiness corporation shares;

• business income related to the disposition of intangiblecapital property that is qualified farm or fishing property (thisincome is deemed to be a capital gain for the purposes of theexemption).

Another exemption may be claimed with regard to certainresource property.

For further information, see Chapter 7.

Exempt capital gains balanceIf you made an election under which you were deemed to haverealized a capital gain on February 22, 1994, on securitiesissued by a flow-through entity, you created an exempt capitalgains balance. You may use your balance to reduce the capitalgains allocated to you by the entity. You may also use it toreduce the capital gain you realized on the disposition of aportion of the securities or, where you disposed of all thesecurities (or the residual portion of them), to increase the ACB.See “Flow-through entity” in section A of Chapter 7.

This chapter gives an overview of the tax treatment of capitalgains; more detailed information is contained in subsequentchapters. For information about capital losses, see Chapter 8.

ReservesIf you realized a capital gain on the disposition of property in agiven year, and part of the proceeds of disposition is payable ina subsequent year or years, you may deduct a reserve withrespect to the capital gain (see Chapter 5).

Acquisition of replacement propertyYou may elect to defer reporting a capital gain realized on aninvoluntary disposition of property (resulting from expropriation,theft, damage, etc.) or on the disposition of property used to carryon your business, provided you acquire replacement propertywithin the prescribed time limit (see Chapter 6, section B).

Disposition of eligible small business corporationshares: rollover ruleYou may defer reporting a capital gain realized on the disposi-tion of an eligible small business corporation share if youacquired another eligible share and you meet certain conditions(for example, with regard to the issuing corporation, the timelimit for acquiring the new shares, and the length of time thenew shares are held). You must complete form TP-232.2-V,Deferral of the Capital Gain Realized on Small Business Corpo-ration Shares. For further information, refer to Chapter 6,section C.

Donation of certain property to a qualified doneeIf you realized a capital gain on the donation of certain propertyto a charity or other qualified donee (other than a privatefoundation), you may reduce your inclusion rate by half. Thismeasure applies to capital gains realized on• gifts of certain securities (in particular, shares listed on a

prescribed stock exchange and units of a mutual fund trust);• ecological gifts (gifts of land with undeniable ecological value

or a servitude encumbering such land). In this case, a certifi-cate from the Ministère de l’Environnement du Québec,confirming the FMV of the gift, must be enclosed with yourincome tax return.

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Chapter 4

Tax treatment of various types of propertyB. Depreciable propertyThe capital cost of a property cannot be deducted as a currentexpense for a taxation year. On the other hand, if the propertybelongs to a class prescribed by the Regulation respecting theTaxation Act, you may deduct its cost over time by claimingcapital cost allowance (CCA). Depreciable property is dividedinto different classes, each with its own CCA rate, calculationmethod and maximum depreciable amount. Depending on therate applicable to the property concerned, CCA may be claimedfor a single year or over a number of years.

The elements that that make up the cost of a depreciableproperty are said to constitute its capital cost (see the definitionof “adjusted cost base” in Chapter 2). However, if you use onlya portion of the property to carry on a business or to earn rentalincome, the capital cost of the property must be prorated on thebasis of the portion so used. As a rule, the amount that may beclaimed as capital cost allowance equals• the capital cost of all the property in the class (if the calcula-

tion is being done for the first time) or the undepreciatedcapital cost of all the property in the class (for subsequentcalculations), multiplied by

• the CCA rate for the class.

The undepreciated capital cost (UCC) of the property in aparticular class is generally equal to the capital cost of all ofthe property in the class minus the total amount claimed asCCA during previous years. If you dispose of a property in theclass, you must subtract from the above result the lower ofthe following amounts:• the proceeds of disposition of the property in question,

minus the expenses relating to the disposition;• the capital cost of the property in question.

If you are required to report a capital gain on depreciableproperty, enter the amount of the gain on line 14 of Schedule Gor, in the case of qualified farm or fishing property, on line 52or 53. If, further to the disposition of this property and all otherproperty in the same class, the UCC of the property in the classis a negative amount at the end of the year, this amountconstitutes a recapture of capital cost allowance. You mustreport a recapture of CCA as business or rental income (asapplicable).

This chapter describes the tax treatment applicable to disposi-tions or deemed dispositions of different types of property,provides information on reporting capital gains and losses, andexplains how to obtain tax benefits through certain electionsyou may make under the Taxation Act. It also indicates whichlines of Schedule G of the income tax return must be used toreport capital gains or losses.

Before reading this chapter, we suggest you read Chapter 6 ifany of the special cases described in that chapter apply to you.You should read Chapter 6 if you• transferred property to a person with whom you were not

dealing at arm’s length;• disposed of property and subsequently acquired replacement

property, in the course of operating a business or following aninvoluntary disposition (expropriation, damage, theft, etc.);

• disposed of eligible small business corporation shares andsubsequently acquired replacement shares;

• donated property to a qualified donee;• are deemed to have disposed of property further to a change

in use or further to your departure from Canada;• are a member of a partnership that disposed of property.

The information in Chapter 6 will help you determine whetheryou are required to determine a capital gain (or loss) for the yearin question, or whether you may make certain elections.

A. Immovable propertyImmovable property (also referred to as “immovables,” “realproperty” or “real estate”) comprises land and buildings. Whenreporting capital gains or losses on the disposition of immovableproperty, you must take into account whether the property givesentitlement to the capital gains exemption. Enter on line 14 ofSchedule G the net capital gains (or losses) on immovableproperty that does not give entitlement to the exemption (i.e.,immovable property that is not qualified farm property), and online 52 the net capital gains or losses on immovable propertythat does give entitlement to the exemption (i.e., immovableproperty that is qualified farm property).

However, the total of the capital gains respecting immovableproperty that is also personal-use property is subject to specialrules, and must therefore be reported on line 16 of Schedule G.For further information, see section D below.

If the immovable property is also depreciable property (i.e.,property of a prescribed class that was used to earn business orproperty income), read section B below.

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A broker or dealer in securities is• a person who participates in the promotion or underwrit-

ing of a particular issue of shares, bonds, or other securities;or

• a person who publicly presents himself or herself as abroker of shares, bonds or other securities.

However, an officer or employee of a person described aboveis not included in this definition, unless that officer oremployee handles security transactions as part of the promo-tional or underwriting activities of the employer concerned.

Points 1 and 2 below explain how to report capital gains andlosses realized on the disposition of securities and otherproperty.

1 – Shares and mutual fund unitsCapital gains and losses resulting from the disposition of sharesor of units of a mutual fund trust must be reported on thefollowing lines of Schedule G:• line 10, unless the gains or losses relate to shares that are

qualified farm property, qualified small business corporationshares or resource property;

• line 46, if the gains or losses relate to shares that are classedas resource property (and that are not qualified farm prop-erty or qualified small business corporation shares);

• line 52, if the gains or losses relate to shares that arequalified farm property owned by you or your spouse, or line56 or 58 if they relate to shares owned by a family farmpartnership of which you or your spouse was a member;

• line 54, if the gains or losses relate to qualified smallbusiness corporation shares owned by you or your spouse, orline 56 or 58 if they relate to shares owned by a partnershipto which you were related. See note below.

See Chapter 7 for the definitions of qualified farm property andqualified small business corporation share.

NOTE: If a loss sustained with respect to such shares isconsidered a business investment loss, it may be deductedfrom your income from all sources. Enter the loss on line 234of your income tax return. For further information, seeChapter 9.

Shares of a bankrupt or insolvent corporationIf you or a person with whom you were not dealing at arm’slength sustained a capital loss or a business investment loss ona share of a corporation that went bankrupt or became insol-vent, and the corporation (or a corporation it controlled) resumedits activities within 24 months after the date on which you or theother person sustained the loss, you must report a capital gainequal to the amount of the capital loss in question if you wereholding the share at the time the corporation resumed itsactivities.

A loss on the disposition of depreciable property does not giveentitlement to a deduction for capital losses. However, if theproperty disposed of was the last property remaining in aparticular class, and the UCC of the property in the class is apositive amount at the end of the year, this amount constitutesa terminal loss. You may deduct a terminal loss from businessor rental income.

C. Securities and other property

A Canadian security is a security, other than a prescribedsecurity (see definition below), that is a share of the capitalstock of a corporation resident in Canada, a unit of a mutualfund trust, or a bond, bill, note, obligation secured by amortgage or similar obligation issued by a person resident inCanada.

A prescribed security includes• a share of the capital stock of a corporation (other than a

public corporation) whose value, at the time you dispose ofit, is primarily attributable to immovable (real) property,Canadian or foreign resource property, or a combination ofimmovable and resource property;

• a bond, bill, note, obligation secured by a mortgage orsimilar obligation issued by a corporation (other than apublic corporation) with which, at any time before youdispose of the security, you are not dealing at arm’s length;

• a share, bond, bill, note, obligation secured by a mortgageor similar obligation that you acquired from a person withwhom you are not dealing at arm’s length.

The distinction between Canadian securities (see definitionabove) and other securities is an important one, as you mayelect to consider any income or loss from the disposition ofCanadian securities you owned, own, or will own, to be acapital gain or loss. To make such an election, you mustcomplete form TP-250.1-V, Election Respecting the Disposi-tion of Canadian Securities, and file it with your income taxreturn for the taxation year in which the disposition took place.You cannot make the election if you were acting as a broker ordealer in securities (see definition below) in respect of thedisposition, or if you were not resident in Canada at the time ofthe disposition. If you are a member of a partnership thatdisposed of Canadian securities it owned, you are considered tohave disposed of the securities yourself. You may make theelection individually, without the other members of the partner-ship being required to do so.

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2 – Bonds and other securities or propertyCapital gains and losses on bonds and other securities orproperty must be reported on line 12 of Schedule G. Forexample, a capital gain realized on the disposition of a deben-ture, bill or note, an interest in a trust (including a unit of a unittrust that is not a mutual fund trust) or an interest in apartnership may be reported on this line.

For publicly traded securities, refer to the information on yourRL-18 slip (or your T5008 slip if you did not receive an RL-18slip), or on the statement of account you received from yourstockbroker.

Bad debtsA bad debt is a debt that is uncollectible. A bad debt may beconsidered a capital loss or a business investment loss; in thelatter case, the loss can be deducted on line 234 of your incometax return. For further information, refer to section A of Chap-ter 8 under “Bad debt or shares of a bankrupt or insolventcorporation,” and read Chapter 9.

If the debt resulted from a disposition of personal-use property,the loss claimed must not exceed the capital gain reported onthe property.

Other property

As used in this section, the term “other property” includessecurity options (options to purchase shares or other securi-ties), foreign currency, discounts, premiums and bonuses,provided the disposition or deemed disposition of the prop-erty gives rise to a capital gain or loss.

Security optionsIf you dispose of a security option granted to you by youremployer or a person not dealing at arm’s length with youremployer, you will not have a capital gain or loss.

In other cases, the following rules apply:• If the option you held expired during the year, you are deemed

to have disposed of it and to have sustained a capital lossequal to the ACB of the option on the expiration date.

• If you sold your option during the year, the difference be-tween the proceeds of disposition and the ACB of the optionconstitutes your capital gain or loss.

Foreign currencyIf you made foreign currency transactions that resulted incapital gains or losses, report only the portion of the net gain ornet loss that exceeds $200.

To determine the net gain (or net loss), subtract total lossesfrom total gains, where both amounts resulted from the ex-change differential between Canadian and foreign currencies.

Discounts, premiums and bonusesSome debt obligations include a discount when they are issued,a premium when they are redeemed, or a bonus payable beforeor at maturity.

A security is issued at a discount if the issue price is lower thanthe face amount. A security may also entitle the holder to apremium or bonus (an amount payable in addition to the faceamount).

As a rule, if you acquired securities as an investor or if you madean election on form TP-250.1-V (see the third paragraph ofsection C above), the amount of the discounts, premiums orbonuses granted to you constitutes a capital gain. This gainmust be reported for the taxation year in which the securitymatures or the year of disposition, as applicable.

Please note the following special rules concerning the reportingof discounts and premiums:• If you receive a cash premium when a Québec or Canada

savings bond reaches maturity, you must report one-half of itas interest.

• If you have a Treasury bill that was issued at a discount, andyou redeem it at maturity, the amount by which the redemp-tion price exceeds the issue price constitutes interest. However,if you dispose of the bill before it matures, you may have acapital gain or loss (as well as interest). The capital gain orloss is calculated by subtracting the total of the ACB and theinterest from the proceeds of disposition.

D. Personal-use property

Personal-use property is property that you own in whole orin part and that serves primarily for your personal use orenjoyment, or for the personal use or enjoyment of one ormore persons who belong to a group to which you and thepersons related to you belong.

Personal-use property may include personal or household items,furniture, automobiles, houses, boats, antiques, etc., as well asdebts owed to you further to the disposition of such property oran option to acquire such property. If the personal-use propertyis cultural property, see section F below. If it is preciousproperty, see Chapter 8.

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Capital gainsYou are required to report a capital gain on personal-useproperty only if the proceeds of disposition are $1,000 or more.In this case, the ACB of the property is deemed to be equal to$1,000 or to the actual ACB, whichever is higher. This presump-tive assessment is not applicable to property acquired afterFebruary 27, 2000, as part of an arrangement to make acharitable gift of the property.

If you are required to report a capital gain on personal-useproperty, including a principal residence, enter the amount online 16 of Schedule G. The special rules applicable in the case ofa principal residence (concerning change of use, transfer to aspouse, and the type of property that may be designated as aprincipal residence) are explained in section E below.

Capital lossesA capital loss on the disposition of personal-use property is notdeductible, unless the property is a bad debt (see under “Baddebts” above) that was owed to you as the result of thedisposition of personal-use property to a person with whom youwere dealing at arm’s length at the time of disposition.

E. Principal residenceBefore reading this section, we suggest you read section Dabove.

If you designated your residence as your principal residence forall the years you owned it, you are not required to report thecapital gain realized on its disposition or deemed disposition. Ifyou did not designate your residence as your principal residencefor all the years you owned it, you may have to report a portionof such a gain.

Consequently, if you disposed of your residence during the year(or are deemed to have disposed of it), or if you granted an optionto purchase your residence, you must complete form TP-274-V,Designation of Property as a Principal Residence, and enclose itwith your income tax return for the year. Form TP-274-V allowsyou to designate your property as your principal residence and,if applicable, to calculate the portion of your capital gain that issubject to income tax. This portion may be reduced if you or yourspouse made an election whereby you are deemed to haverealized a capital gain on your principal residence on Febru-ary 22, 1994. To calculate the capital gains reduction,complete form TP-274.S-V, Reduction of the Capital GainDeemed to Have Been Realized on a Principal Residence.Then carry the amount of the reduction to form TP-274-V,Designation of Property as a Principal Residence.

Since a principal residence is personal-use property, a losssustained on its disposition is not deductible.

Below you will find information on the designation of a principalresidence, and on the change-of-use rules that apply to propertythat was formerly, or has become, your principal residence.

DesignationYou may designate as your principal residence for a given yeara property that is• a housing unit (see definition below);• a leasehold interest in a housing unit; or• a share of the capital stock of a housing co-operative, that

confers the right to inhabit a housing unit owned by the co-operative.

A housing unit may be a house, duplex, condominium,cottage, mobile home, trailer, or floating home.

A principal residence is deemed to comprise the land on whichit is built as well as the adjoining land necessary for the owner’suse and enjoyment. However, any portion of the total lotexceeding one-half hectare is not considered part of the princi-pal residence, unless the owner can show that the surplus isnecessary for the use and enjoyment of the residence. Lotslarger than one-half hectare may be necessary where• a municipal by-law or provincial law requires residential lots

to be larger than one-half hectare;• the location of a building makes a larger lot necessary in order

to have access to public roads.

Conditions for designationYou may designate a property as your principal residence onlyif you, your spouse, your former spouse or your child ordi-narily used the property as a housing unit during the year. Inthe following cases, you may still designate property as yourprincipal residence for the period during which you were notusing it as a housing unit:• You converted your principal residence to income-producing

property.• You converted income-producing property to your principal

residence.You must make an election under which, for a period notexceeding four years, the property was substituted for yourprincipal residence after you began using it to earn income, orwhile you were using it to earn income, before converting it toyour principal residence, as applicable. For further information,see below under “Change of use and election.”

You may designate a property as your principal residence evenif the time of occupation was short. This may be the case for asecond residence, for example, provided it was not acquiredmainly for the purpose of earning income. (A property thatoccasionally produces rental income is not considered to havebeen acquired for the purpose of earning income.)

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You may not designate a property as your principal residenceunless all of the following conditions are met:• You owned the property, alone or jointly with another person.• You designate the property, to the exclusion of any other, as

your principal residence for the year.• No other property was designated as a principal residence for

the year (in the case of years after 1981) by– you;– your spouse, unless he or she lived apart from you through-

out the year, pursuant to a judicial separation or a writtenseparation agreement;

– your child, unless, during the year, he or she had a spouseor was aged 18 or over;

– your father or mother, or your brother or sister (unless,during the year, the brother or sister had a spouse or wasaged 18 or over), if you yourself did not have a spouse andwere not aged 18 or over during the year.

Change of use and electionA change in the use of property constitutes a form of deemeddisposition. If you acquire property for use as your principalresidence and later use it to earn income or, conversely, youacquire property to earn income and later use it as your principalresidence, you are considered to have changed the use of theproperty.

In such cases you are deemed to have disposed of the propertyat the time of the change of use for proceeds equal to the FMVat that time, and to have reacquired the property immediatelythereafter at a cost equal to its FMV. However, in the case of aresidence converted to income-producing property, you are notrequired to report the capital gain you realized at the time of thechange, provided you have designated the property as yourprincipal residence from the date you acquired it to the date youchanged its use.

Even if you are deemed to have disposed of a property furtherto a change of use, you may make an election whereby thechange-of-use rules do not apply. In this case, you will not berequired to report the capital gain (or loss) that would normallyhave resulted from the deemed disposition. The sections thatfollow explain how to make such an election.

Principal residence converted to income-producingpropertyTo make an election in respect of a principal residence that youconverted to income-producing property, enclose with yourincome tax return for the year in which the change of use tookplace a letter in which you describe the property and state thatyou are electing to have the provisions of section 284 of theTaxation Act apply. Under the terms of the election, youdesignate the property as your principal residence for the yearor for any subsequent year in which you use the property to earn

income. As a rule, the period covered by the designation cannotexceed four years (see note below).

You are still required to report the income you earn from theproperty. However, you cannot claim capital cost allowancewith respect to the property.

NOTE: The four-year limit respecting designation as a prin-cipal residence may be extended if all of the followingconditions are met:• You are not living in your principal residence because of

a change in the location of your or your spouse’s place ofwork, and you or your spouse, as applicable, are dealingat arm’s length with the employer.

• Your new dwelling is at least 40 kilometres closer to youror your spouse’s new place of work.

• You resume living in your principal residence while you oryour spouse holds the same employment, or before theend of the year following the year in which the employ-ment ends.

Income-producing property converted to a principalresidenceTo make an election in respect of income-producing propertythat you converted to a principal residence, enclose with yourincome tax return for the year in which the change of use tookplace a letter in which you describe the property and state thatyou are making an election under section 286.1 of the TaxationAct. Under the terms of the election, you designate the propertyas your principal residence for the year or for any previous yearin which you used the property to earn income. The periodcovered by the designation cannot exceed four years.

For the election to be valid, both of the following conditionsmust be met:• You, your spouse or a trust of which either of you is a

beneficiary did not claim capital cost allowance with respectto the property for any taxation year ending after 1984 and nolater than the date on which the use of the property changed.

• You make the election by the earlier of the following dates:– the 90th day after the Ministère sends you a notice re-

questing that you make the election;– the filing deadline for the income tax return for the year in

which you actually disposed of the property.

Please note that the election does not relieve you of theobligation to report recapture of capital cost allowance result-ing from the change of use of the property.

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F. Cultural propertyIf you sold or donated property to a prescribed institution orauthority, a certified archival centre, or an accredited museum,and you received a document certifying that the property iscultural property, you are not required to report the capital gainrealized on the disposition the property. If you sustained a losson the disposition, the loss is not deductible if the culturalproperty is personal-use property other than precious property(see section D above). However, the loss is deductible if thecultural property disposed of is precious property and certainconditions are met.

NOTE: Property that is a testamentary gift to one of theabove-mentioned donees is considered to be cultural prop-erty only if it vested in the donee within 36 months after thedonor’s death. (The time limit can be extended if the donor’slegal representative obtains the consent of the Ministère.)

G. Intangible capital propertyThe acquisition cost of intangible capital property is consideredto be a capital expenditure; therefore, as with depreciableproperty, you may not deduct the full acquisition cost in thecalculation of your business income. However, you may includethree-quarters of the acquisition cost in an “eligible intangiblecapital amount” account and claim an annual deduction of upto 7% of this amount. This procedure must be followed for eachbusiness in respect of which you hold intangible capital prop-erty. If you acquired intangible capital property from a personwith whom you were not dealing at arm’s length, see Note 1following the work chart below.

If you disposed of intangible capital property of a businessduring the fiscal period of the business that ended in the year forwhich you are completing your income tax return, you mustsubtract from the eligible intangible capital amount of thebusiness three-quarters of the amount by which the proceedsof disposition of the property exceed the expenses related to thedisposition of the property. For further information, refer to thebrochure Business and Professional Income (IN-155-V). If theeligible intangible capital amount is a negative amount at theend of the fiscal period, you must include an amount in theincome of the business concerned (see line 15 of the work chartbelow). You may, however, elect to report as a capital gain, thetaxable gain resulting from the disposition of intangible capitalproperty whose original cost can be determined (see Note 2following the work chart below).

If the intangible capital property is qualified farm property orqualified fishing property, an amount may give entitlement tothe $500,000 capital gains exemption for the year. Thisamount, which is deemed to be a capital gain and is referred toas “farm or fishing income derived from the disposition ofintangible capital property” (line 27 of the work chart), must beentered for information purposes on line 86 of Schedule G.

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Eligible intangible capital amount of the business at the end of the fiscal period.Enter the amount only if it is negative; do not use brackets.

Total of the deductions respecting intangible capital property,for previous fiscal periods ending after the adjustment time*

Total of the reductions that resulted from debt forgivenessand that were previously applied to the eligible intangible capital amount

Total of the deductions respecting intangible capital property,for fiscal periods that ended before the adjustment time

Total of the amounts included with respect to intangiblecapital property for the fiscal periods covered on line 4Subtract line 5 from line 4. If the result is negative, enter 0.Add lines 2, 3 and 6.

Total business income derived from the disposition of intangible capital property,for previous fiscal periods after the adjustment time, where the income is consideredto be the recovery of deductions claimed

Subtract line 8 from line 7.

Amount from line 1 or 9, whichever is lower: this amount is considered to be the recoveryof deductions claimed and constitutes, for the fiscal period, business incomederived from the disposition of intangible capital property.If you enter the amount from line 1, proceed directly to line 14 and enter 0.

Amount from line 6 x 1/2 =Amount from line 9 + Amount from line 11 =Subtract line 12 from line 1.

Multiply line 13 by 2/3. The result constitutes business income derived from the disposition of intangiblecapital property, other than the recovery of the deductions claimed for previous fiscal periods.

Amount to be added to the business income, further to the disposition of intangible capital property:

Amount from line 10 + Amount from line 14 =

Continue your calculation only if the amount on line 14 is positiveand the intangible capital property disposed of is qualified farm or fishing property

Fiscal periods Fiscal period endingbeginning after 1987 after February 27, 2000,

but ending before but before Fiscal periods endingFebruary 28, 2000 October 18, 2000 after October 17, 2000

Total proceeds of the disposition of intangible capitalproperty that is qualified farm or fishing property of the business

Total cost of the intangible capital property covered on line 16Subtract line 17 from line 16, in each column.Non-deductible expenses incurred to dispose of the propertySubtract line 19 from line 18, in each column.Inclusion rateMultiply line 20 by the applicable rate, in each column.

Total of the amounts on line 21

Total deemed taxable capital gains for fiscal periods beginning after 1987and ending before February 23, 1994

Total deemed taxable capital gains that constitute farm or fishing income derived fromthe disposition of intangible capital property, for previous fiscal periodsending after February 22, 1994

Add lines 23 and 24.Subtract line 25 from line 22.

Enter the amount from line 14 or 26, whichever is lower, and carry it to line 86 of Schedule G.Farm or fishing income derived from the disposition of intangible capital property

(may give entitlement to the taxable capital gains exemption)

* The adjustment time is the start of the first fiscal period that began after 1987.

1

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14

2

3

4

5

67

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17

NOTE 1: The amount obtained by calculating three-quarters of the cost of the intangible capital property youacquired during the year must be reduced if, with respectto the intangible capital property, you were not dealing atarm’s length with the former owner (the person disposing ofthe capital property), who is deemed to have realized ataxable gain (business income derived from the dispositionof intangible capital property, other than the recovery of thedeductions claimed for previous fiscal periods, or a taxablecapital gain, where the former owner made the electionmentioned in Note 2).

The reduction equals the total of the following amounts:• 50% of the taxable gain that the former owner is deemed

to have realized; and• the exemption claimed by the former owner with respect

to the gain, if applicable.

NOTE 2: With respect to intangible capital property (otherthan goodwill) whose original cost may be determined, andfor which the proceeds of disposition are higher than theoriginal cost, an election may be made so that• the intangible capital property is deemed to have been

disposed of for proceeds equal to its cost (in which casethe property is simply withdrawn from the eligible intan-gible capital amount of the business, with no effect onbusiness income); and

• the property is deemed to be capital property that wasdisposed of for proceeds equal to the actual proceeds ofdisposition, and to have an ACB equal to the cost inquestion. The taxable capital gain realized may be re-duced (or cancelled), provided the transferor has a balanceof net capital losses that may be carried over. The capitalgain may give entitlement to the capital gains exemption,if the capital property is qualified farm property, and thetransferor does not have an exempt capital gains balancethat could be used to reduce (or cancel) this capital gain.

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Chapter 5

ReservesProperty disposed of after November 12, 1981,but before 1997For property disposed of after November 12, 1981, but before1997, the reserve determined above for a given taxation yearmust not exceed the result of the following calculation:

4 – YCapital gain x

5

The variable Y represents the number of taxation years, includ-ing the year of disposition, prior to the taxation year in question.Variable Y equals 0 if the calculation is for the year in which thedisposition occurred, 1 if it is for the following year, and so on.

Replace 4 and 5 by 9 and 10, respectively, in the formula if youdispose of property to your child and the property is• land or depreciable property located in Canada that you, your

spouse or one of your children used in the operation of afarming business;

• a share of the capital stock of a family farming corporation oran interest in a family farming partnership; or

• a share of the capital stock of a small business corporation.

Property disposed of in 1997 or subsequent yearsIn the case of capital property disposed of in a taxation year thatended after October 16, 1997, the amount claimed as a reservefor Québec income tax purposes must not exceed the amountclaimed for federal tax purposes.

B. Reserve claimed by a memberof a partnership

If the partnership of which you were a member deducted areserve for a fiscal period that ended during your taxation year,and is required to file a partnership return for that fiscalperiod, the amount of the reserve will be shown in box 11 of theRL-15 slip. The partnership will have provided particulars con-cerning the reserve in the centre of the RL-15 slip. Use theamounts indicated there to reduce the capital gains shown inbox 10 or 12 (or, if applicable, to increase the capital lossesshown in box 10 or 12), and carry the result to Schedule G.

If the partnership is not required to file a partnershipreturn, read the information that follows to find out how toreport your reserve. If you need information on the dispositionof property by a partnership, read section G of Chapter 6 as well.

If you dispose of property in a given taxation year and a portionof the proceeds is payable after the end of that year, you mayclaim a reserve in order to reduce the capital gain you arerequired to report with regard to the property for the year.However, you may not claim a reserve if either of the followingsituations applies to you:• At the end of that year, or at any time in the following year, you

were not resident in Canada or were exempt from income tax.• You disposed of the property to

– a corporation that you controlled, directly or indirectly,immediately after the disposition, or

– a partnership in which you held a majority interest.

You may claim reserves on the following lines of Schedule G:• line 32 or 38, for property other than qualified farm or fishing

property, qualified small business corporation shares or re-source property (see note below);

• line 63 or 77, for qualified farm or fishing property orqualified small business corporation shares.

However, if you are claiming a reserve as a member of apartnership, read section B below.

A reserve deducted for a given year must be reported as a capitalgain for the following year. This gain must be entered on line 36or 71 of Schedule G. Under certain circumstances, a reserve thatis treated as a capital gain gives entitlement to a capital gainsexemption (see Chapter 7).

NOTE: In the case of resource property that is not classed asqualified farm property or qualified small business corpora-tion shares, the reserve that you report as a capital gain orthat you deduct must be included in the calculation of theamount on 46 of Schedule G.

A. Calculating a reserveReserves are calculated as explained below, depending on thedate of disposition.

Property disposed of before November 13, 1981For property disposed of before November 13, 1981, or afterNovember 12, 1981, pursuant to an offer or agreement whoseterms and conditions were fixed by the latter date, the reservefor a given taxation year is calculated as follows:

Portion of proceeds of dispositionpayable after the end of the year

Capital gain xProceeds of disposition

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You must use the information the partnership is required to giveyou to determine your share of the partnership’s reserve. Beforeentering your share of the partnership’s capital gains onSchedule G, you must add your share of any reserve thepartnership claimed for the previous year and subtract yourshare of any reserve the partnership is claiming for the currentyear. Before entering your share of the partnership’s capitallosses on Schedule G, you must subtract your share of thepartnership’s reserve for the previous year and add your shareof the partnership’s reserve for the current year.

If you are adding or deducting a reserve, you must take thereserve into account in the calculation of the amounts to beentered on the following lines of Schedule G:• line 24, for property other than qualified farm or fishing

property, qualified small business corporation shares or re-source property;

• line 48, for resource property that is not classed as qualifiedfarm property or qualified small business corporation shares;

• line 58, for qualified farm or fishing property and qualifiedsmall business corporation shares.

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Chapter 6

Special cases

An alter ego trust is a trust created after 1999 by anindividual who is at least 65 years of age; during theindividual’s lifetime, he or she receives all the income of thetrust, and no other person may receive or otherwise obtainthe use of any portion of the trust’s income or capital.

A joint spousal trust is a trust created after 1999 by anindividual or by the individual and his or her spouse (whereat least one of these persons is 65 or older), for their jointbenefit during their lifetimes; while one of the spouses isalive, no one other than the individual or the spouse mayreceive or otherwise obtain the use of any portion of thetrust’s income or capital.

However, you may not apply the rollover rule if you created• a joint spousal trust, and you were not 65 at the time the trust

was created; or• an alter ego trust, and the trust made an election, in the

trust return filed for its first taxation year, to have the firstdate of disposition occur (under the 21-year rule) on the21st anniversary of the creation of the trust, rather than onthe date of your death.

The rollover rule may be applied to a transfer of property to atrust (other than an alter ego trust) that you created after 1999for your own benefit, without your age being a factor. Thistransfer must not change the beneficial ownership of theproperty; moreover, immediately following the transfer, noother person or partnership may have an absolute or conditionalright as a beneficiary of the trust.

Property other than depreciable propertyIf you transfer property that is not depreciable property, youare deemed to have disposed of the property for proceedsequal to its ACB immediately before the transfer.

However, if the property in question was your principalresidence, it is considered• to have been owned by the spouse, former spouse or

spousal trust from the time you acquired it; and• to have been the principal residence of the spouse, former

spouse or spousal trust during all the years you used it asyour principal residence.

As the law does not take into account such a transfer, you arenot required to file form TP-274-V, Designation of Propertyas a Principal Residence, with your income tax return for theyear of the transfer. However, the form must be filed by yourspouse or former spouse, or by the spousal trust, for the yearin which the property is disposed of or is deemed to havebeen disposed of.

This chapter explains the tax treatment of the following trans-actions and events:• the transfer of property to a person with whom you are not

dealing at arm’s length;• the disposition of property followed by the acquisition of

replacement property;• the disposition and subsequent acquisition of small business

corporation shares;• the donation of property to a charity or other qualified donee;• the change in the use of property;• emigration from Canada;• the disposition of property by a partnership of which you were

a member.

A. Transfer of property betweenpersons not dealing at arm’slength

As a rule, when you transfer property to a person with whom youare not dealing at arm’s length, for proceeds equal to zero or fora price that is lower than the FMV of the property at the time ofthe transfer, you are deemed to have disposed of the propertyfor its FMV at that time. The resulting capital gain or loss mustbe reported in your income tax return for the year of the transfer.

However, the Taxation Act provides for special rules and elec-tions in the case of the transfers discussed in the points below.

Inter vivos transfer to a spouse,a former spouse or a personal trustWhere you transfer property directly or indirectly, through atrust or otherwise, to a person who is your spouse or formerspouse or to a personal trust, there are no immediate taxconsequences for you, provided you and the transferee wereboth resident in Canada at the time of the transfer. This ruleis ordinarily referred to as the “rollover rule.” In the caseof a former spouse, the transfer must be made in accordancewith a right resulting from the marriage or de facto union.

In this section, the term “personal trust” is used to refer to aspousal trust and, for 2000 and subsequent years, to an alterego trust or a joint spousal trust.

As a rule, a spousal trust is a trust for the exclusive benefitof the spouse during the spouse’s lifetime; the spouse isentitled to receive all income of the trust, and no one otherthan the spouse may receive or otherwise obtain the enjoy-ment of the trust’s income or capital.

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Depreciable propertyIf the property you transfer is depreciable property, you aredeemed to have disposed of the property for proceeds equalto the result of the following calculation: A x B C,whereA is the UCC of all the property in the same class;B is the FMV of the property disposed of;C is the FMV of all the property in the same class.

For the transferee, the acquisition cost of the property isdeemed to be equal to your proceeds of disposition as deter-mined above. In the case of depreciable property, the transfereeis deemed to have claimed the same amount of capital costallowance (CCA) as you claimed. These considerations willaffect the amounts to be reported or deducted by you or thetransferee upon subsequent disposition of the property (seenote below).

However, you may elect not to apply the rollover rule, sothat your proceeds of disposition and the transferee’s acquisi-tion cost are each deemed to equal the FMV of the property atthe time of transfer. You must then report the capital gain (orloss) and any resulting recapture of CCA (or any terminal loss)for the year in which the transfer took place. If there is a capitalgain, you may be entitled to a capital gains exemption (seeChapter 7). To make the election, you must enclose with yourincome tax return for the year in question a document provingthat you made the election with the CRA pursuant to subsec-tion 73(1) of the Income Tax Act.

NOTE: The rule respecting the attribution of income must beapplied if you transferred or lent property directly or indi-rectly, through a trust or otherwise, to a person who was yourspouse or who subsequently became your spouse. Under thisrule, the capital gain (or loss) that your spouse realizes on thesubsequent disposition or deemed disposition of the prop-erty is deemed to be your capital gain or loss. Likewise, inthe case of depreciable property, any terminal loss or recap-ture of CCA that this person realizes on the disposition ordeemed disposition is deemed to be your CCA recapture orterminal loss.

The rule respecting the attribution of income applies if, at thetime of the subsequent disposition, you were still resident inCanada and were still the spouse of the transferee. However,the rule does not apply to a deemed capital gain (or loss)resulting from the emigration of your spouse, unless you andyour spouse decide otherwise by making a joint election tothat effect in your tax returns for the first taxation yearending after the emigration.

Transfer to a taxable Canadiancorporation or a Canadian partnershipIf you transfer property• to a taxable Canadian corporation for a consideration that

includes a share of the capital stock of the corporation, or• to a Canadian partnership of which you are a member

immediately following the transfer,you may be exempted from the rule under which the proceedsof disposition of a property are equal to its FMV on the date ofdisposition.

To be exempted, you and the transferee (the corporation orpartnership in question) must first make an election with theCRA in order to agree on the amount of the deemed proceedsof disposition (known as the “amount agreed on”). Then com-plete and file form TP-518-V, Disposition of Property by a Taxpayerto a Taxable Canadian Corporation, or form TP-614-V, Transferof Property to a Canadian Partnership, as applicable. As a rule,you must enter the amount agreed on and indicated in formT2059, the CRA election form. You may, however, agree on adifferent amount if the conditions mentioned in form TP-518-Vor TP-614-V are met.

Subsection (21.2) of section (13) of the Income Tax Act makessuch an election impossible where the transfer of depreciableproperty to a partnership is considered to be a transactioninvolving a person affiliated with you (see the discussion ofdepreciable property under “Transactions involving a personaffiliated with you” in Chapter 8). In such a case, the transfereepartnership and you may still file a request for rollover withthe Ministère du Revenu, if the conditions mentioned in formTP-614-V are met.

You may also complete and file form TP-518-V or TP-614-V toamend a previously filed form and to agree on an amount (if noamount was previously agreed on), indicate that no amount wasagreed on or agree on a different amount.

You must file form TP-518-V or TP-614-V with the Ministèreseparately from any tax return, by the later of the followingdates:• the filing deadline for your taxation year in which the dispo-

sition occurred or the taxation year of the corporation (orpartnership) in which the disposition occurred, whichever isearlier, or

• the last day of the two-month period following the end of oneof these taxation years, whichever is later.

You must enclose with this form a copy of every document filedwith the CRA in accordance with subsection 85(1) or subsection97(2) of the Income Tax Act, as applicable.

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B. Disposition of property andacquisition of replacementproperty

Property is considered replacement property only if it is reason-able to conclude that you acquired it to replace former propertyand you intend the same use for it as for the former property.

If you acquire replacement property, you may elect to defertaxation of the capital gain realized on the formerproperty. The full amount of the capital gain may be deferredif the ACB of the replacement property is equal to or higher thanthe proceeds of disposition of the former property; if this is notthe case, only a portion of the gain may be deferred. Thedeferred capital gain will be taken into account in the taxationyear in which the replacement property is disposed of, as youmust use the amount of the deferred capital gain to reduce thecost of the replacement property or, if the replacement propertyis depreciable property, to reduce its capital cost.

The situations in which you may make this election are de-scribed below.

Replacement property acquired subsequentto an involuntary dispositionIf you are entitled to compensation following an involun-tary disposition (expropriation, theft, destruction, etc.) ofyour property, the compensation is considered the proceedsof disposition of the property. If this disposition results ina capital gain, you may elect to defer taxation of the gainif you acquire replacement property within the prescribedtime (see below under “Time limit for acquiring replace-ment property”).

Replacement property acquired for business purposesIf you disposed of business property and thereby realized acapital gain, you may elect to defer taxation of the gain ifyou acquire replacement property within the prescribedtime (see below under “Time limit for acquiring replace-ment property”).

The election also allows you, where applicable, to defertaxation of an amount of CCA recapture, or of an eligibleintangible capital amount that is negative.

Time limit for acquiring replacement propertyIn the case of an involuntary disposition, the period foracquiring replacement property expires• at the end of the second taxation year following

– the taxation year in which you agreed to an amount asfinal compensation for the property,

– the taxation year in which compensation is definitivelydetermined by a court or tribunal, or

– the second anniversary of the involuntary disposition, pro-vided no proceedings were undertaken before a court ortribunal in the two years following that event; or

• the last day of the 24-month period following the end of theyear of disposition, if that date is later than the others referredto above.

In the case of a voluntary disposition of business property,the period for acquiring replacement property expires on thelater of the following dates:• at the end of the first taxation year following the year in which

the proceeds of disposition became due; or• the last day of the 12-month period following the end of the

year of disposition.

You must inform the Ministère of your election by enclosing,with your income tax return for the year the replacementproperty was acquired, a letter indicating that you are makingan election under section 279 of the Taxation Act. If you alreadyreported a capital gain in respect of the former property in yourincome tax return for the year in which the proceeds of dispo-sition of the property became due, and the replacement propertyis to be acquired one or two years later, the Ministère will adjustyour income tax return to take into account the election.

If you require additional information, contact the Ministère duRevenu.

NOTE: If you were unable to acquire the replacement prop-erty within the time limit referred to above, but can show thatyou took all the necessary measures to acquire the propertywithin the time limit, you may elect to defer taxation of thecapital gain realized on the former property.

C. Disposition and subsequentacquisition of eligible smallbusiness corporation shares

If you disposed of eligible small business corporation shares,you may defer the taxation of your capital gain if youacquired other eligible small business corporation shareswithin the specified time limit. The shares disposed of are calledthe “original shares” and the shares you subsequently acquireare called the “replacement shares.”

Your capital gain does not have to be included in your incomefor the year of disposition, but must be used to reduce the ACBof the replacement shares. This will increase your capital gain(or reduce your capital loss) when you dispose of the replace-ment shares. In order to simplify the explanations that follow,the deferral of capital gains will be referred to as the “rolloverrule” (or the “rule”).

In order to take advantage of the rule, you must meet thefollowing conditions:

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• You held the original shares for a period of at least 185 daysimmediately prior to their disposition, and during the entireperiod of your ownership, the shares were common sharesissued by an eligible small business corporation.

• You acquired the replacement shares during the year in whichthe original shares were disposed of or within 60 days afterthe end of that year, but no later than 120 days after thedisposition. However, if the original shares were disposed ofafter February 18, 2003, then you must have acquired thereplacement shares during the year in which the originalshares were disposed of or within 120 days after the end ofthat year.

In all cases, the replacement shares must be designated as suchin your federal income tax return for the year.

Eligible small business corporation shares have the followingcharacteristics:• They are common shares issued by an eligible small business

corporation.• The carrying value of all the assets of this corporation and any

related corporations does not exceed $50 million immediatelybefore and immediately after the shares are issued.

An eligible small business corporation is a Canadian-controlled private corporation all or substantially all of theFMV of whose assets is attributable to• assets used principally in an active business carried on

primarily in Canada by the corporation or by an eligiblesmall business corporation that is related to the corpora-tion;

• shares issued by or debts owing by other eligible smallbusiness corporations that are related to the corporation.

A business is considered to be active if the corporation carriedon the business principally in Canada for at least 730 daysduring the period beginning at the time the original shareswere acquired and ending at the time they were disposed of(or for the entire period, if it was shorter than 730 days).However, an eligible small business corporation does notinclude the following:• a professional corporation;• a specified financial institution;• a corporation the principal business of which is the leasing,

rental, development or sale of its immovable property;• a corporation more than 50% of the value of whose

property (FMV minus any debts incurred to acquire theproperty) is attributable to immovable property.

A Canadian-controlled private corporation is a private corpo-ration that is a Canadian corporation other than a corporationthat is controlled by one or more persons not resident inCanada or by one or more public corporations (except pre-scribed corporations).

How the rollover rule worksThe rollover rule is intended for individuals (other than trusts).A capital gains rollover is possible even if, at the time ofdisposition, the corporation that issued the original shares is nolonger a private corporation and the value of its assets haschanged. A rollover is also possible where the acquisition of theshares is already covered by another rollover rule, such as thetransfer of shares further to the death of a person’s parents(father or mother) or spouse, or in settlement of a right resultingfrom a marriage or de facto union. In such cases, the person isdeemed to have acquired the shares on the same date and underthe same conditions as the father, mother, spouse or formerspouse acquired the shares.

Use the following formulas to calculate the deferrable capitalgain and the ACB reduction respecting the replacement shares:

• Deferrable gain = A, or A x B C if B is lower than C,whereA is the capital gain realized on the original shares in ques-

tion (if their disposition occurred before February 19, 2003,the $2 million limit for the ACB of the shares must betaken into account in calculating the gain),

B is the cost of the replacement shares (if the disposition ofthe original shares occurred before February 19, 2003, thiscost is also limited to $2 million), and

C is the proceeds of disposition of the original shares.

Enter the amount of the deferred gain on line 94 ofSchedule G. You may also calculate it on form TP-232.2-V,Deferral of the Capital Gain Realized on Small BusinessCorporation Shares, if the original shares were disposed ofbefore February 19, 2003.

• ACB reduction respecting replacementshares = D x E F, whereD is the deferred capital gain,E is the cost of one replacement share, andF is the cost of all of the replacement shares.

D. Gifts to a charity or otherqualified donee

This section deals with gifts of capital property (propertywhose disposition gives rise to a capital gain or loss) that giveentitlement to a tax credit because they are made to aregistered charity, a government or another qualified donee(such as a prescribed Canadian amateur athletic association, arecognized arts organization, or the United Nations and itsagencies).

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As a rule, the FMV of the property at the time the gift is made(referred to as the “value of the gift” on the official receipt)constitutes the proceeds of disposition of the property forcalculating the capital gain (or loss). However, only the eligibleamount of the gift gives entitlement to a tax credit. Thatamount, indicated on the official receipt, equals the value of thegift, unless you received a benefit in gratitude or as partialconsideration for the gift, in which case that amount equals thevalue of the gift minus the value of the benefit.

Where you are required to report a capital gain or CCA recaptureas a result of the gift, you may elect to designate an amountto represent both the proceeds of disposition with respect to theproperty and the value of the gift. The amount thus designatedmust equal• no less than the higher of the following amounts:

– the amount of the benefit received in gratitude or as par-tial consideration for the gift;

– the ACB of the property, or, in the case of depreciable prop-erty, the UCC at the end of the year (the UCC of the classto which the property belongs, calculated as though it werenot a gift); and

• no more than the FMV of the property at the time the gift wasmade.

To make the election, you must enclose with your income taxreturn for the year in which the gift was made, a letter informingthe Ministère that you are designating such an amount undersection 752.0.10.12 of the Taxation Act.

Gifts of certain types of property are subject to special rules fortax purposes. Some examples are provided below.

Cultural propertyFor information concerning cultural property, see section F ofChapter 4.

Works of artIf you donated a work of art that was not created by you and wasnot part of your inventory, the lower of the following amountsis deemed to be the FMV of the property at the time the giftwas made:• the amount that may reasonably be deemed the consider-

ation obtained by the donee upon disposing of the work ofart; and

• the FMV of the work at the time of the disposition.This deemed FMV constitutes both the proceeds of dispositionof the work of art and the value of the gift. You may use thedeemed FMV to calculate the capital gain (or loss) resultingfrom the gift.

In the case of a capital gain, you may elect to designate anamount as both the proceeds of disposition and the value of thegift. The amount thus designated must be• no less than the higher of the following amounts:

– the amount of the benefit received in gratitude or as par-tial consideration for the gift;

– the ACB of the property; and• no more than the deemed FMV of the gift.To make the election, you must enclose, with your income tax returnfor the year the gift was made, a letter stating that you are makingan election under section 752.0.10.12 of the Taxation Act.

The value of the gift of a work of art (or the amount designatedas such) may be increased by 25% for the purpose of calculat-ing the tax credit for gifts if the work of art was donated afterMarch 14, 2000, to a Québec museum.

NOTE: For any gift made under a gifting arrangement, itsvalue (or the amount designated as such) is deemed equal tothe lower of the following amounts: the cost of the property(or its ACB, as applicable) immediately before the donation,or the property’s FMV determined otherwise. The same ruleapplies in respect of a gift made within three years after theproperty was acquired or a gift you intended to make fromthe time the property was acquired.

However, this rule does not apply in respect of an ecologicalgift or a gift of certain securities (see below); a gift ofinventory, real property located in Canada, cultural property,or works of art donated to a Québec museum; or a gift of bareownership of cultural property or a work of art.

Ecological gifts and gifts of certain securitiesYou may reduce by half the capital gain realized on thedonation of any of the following property:• ecological gifts (land with ecological value or a servitude

encumbering land with ecological value) made to certainregistered charities, to the government of Québec or Canada,or to a municipality in Canada (see note below). You mustenclose with your income tax return a certificate attesting tothe FMV of the property, issued by the Ministère del’Environnement du Québec;

• a security donated to a registered charity or other qualifieddonee (but not a private foundation), where the security was– a share or debt obligation listed on a stock exchange,– a prescribed debt obligation (for example, a debt obliga-

tion whose market value can be determined easily, such asa bond issued by a government),

– a share of the capital stock of a mutual fund corporation,– a unit of a mutual fund trust, or– a unit of a segregated fund trust.

If you received a benefit in gratitude or as partial considerationfor the gift, only the portion of the capital gain proportionalto the eligible amount of the gift is reduced by half.

To calculate the adjusted capital gain, you may complete formTP-231-V, Capital Gain Resulting from the Donation of Cer-tain Property.

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NOTE: The proceeds of disposition of a servitude referred toabove and the value of the gift are each deemed equal to thehigher of the following amounts: the FMV of the servitude asdetermined otherwise, or the decrease in the market value ofthe land after the gift is made.

The ACB of the servitude is deemed equal to the ACB of theland prior to the donation, multiplied by the ratio betweenthe proceeds of disposition (or the value of the gift) and theFMV of the land prior to the donation.

Life insurance policiesA life insurance policy is not capital property. If you donated alife insurance policy that had a redemption value, you mustinclude in your income the amount by which the proceeds ofdisposition exceeded the adjusted cost basis of the policyimmediately prior to the disposition. Do not report this amountas a capital gain.

E. Change of useIf you acquire property in order to earn income but later use theproperty for another purpose (or acquire property for purposesother than earning income and later use it to earn income), youhave changed the use of the property. In such cases you aredeemed to have disposed of the property on the date of thechange of use and to have reacquired it immediately thereafterat a cost equal to its FMV. Any capital gain or capital lossresulting from the deemed disposition must be reported in yourincome tax return.

Where you acquire property for purposes other than earningincome but subsequently use the property to earn income, youmay elect not to have the above-mentioned rule apply. In thiscase you are not required to report any capital gain that wouldhave resulted from the deemed disposition. The election is validonly if you inform the Ministère, in a letter enclosed with yourincome tax return for the year of the change of use, that you aremaking an election with regard to the property, pursuant tosection 284 of the Taxation Act. You must report the income youearn by using the property, but you may not claim capital costallowance with respect to it.

If the property concerned is your principal residence, seeChapter 4, section E.

F. EmigrationIf you ceased to be resident in Canada at any time in the year,you are deemed to have disposed of your property immediatelybefore that time for proceeds of disposition equal to its FMV,and to have reacquired the property at a cost equal to thedeemed proceeds of disposition. The capital gain or loss result-ing from the deemed disposition must be reported in yourincome tax return for the taxation year in which you ceased tobe resident in Canada. This measure applies to persons whoceased to be resident in Canada after October 1, 1996.

The following property is excepted:• immovables situated in Canada, resource property and timber

resource property;• capital property used in carrying on a business in Canada,

intangible capital property related to the business, and theinventory of the business;

• the right to receive pension benefits and similar rights (undera registered retirement savings plan, a registered retirementincome fund, a deferred profit-sharing plan, etc.), and rightsrespecting Canadian life insurance policies (except segre-gated fund policies);

• security options (options to purchase shares of the capitalstock of a corporation or units of a mutual fund trust), if theoptions were granted by an employer or by a corporation withwhich the employer was not dealing at arm’s length.

If you are required to pay income tax on a deemed dispositionof property because you ceased to be resident in Canada, youmay elect to defer payment of the tax until the propertyconcerned is actually disposed of, as long as you provideadequate security. For further information, contact the Ministère.

G. Disposition of propertyby a partnership

This section does not apply to you if the partnership of whichyou were a member is required to file a partnership returnfor the fiscal period that ended during your taxation year. In thiscase, refer to the instructions on the reverse side of the RL-15slip.

If the partnership of which you were a member is not requiredto file such a return, read the information below.

Disposition of capital propertyYour share of the capital gains (or losses) will be indicated in theinformation the partnership is required to give you with itsfinancial statements. If you deducted a reserve for the previousyear with respect to your share of the capital gains realized bythe partnership, or if you are deducting a reserve in this regardfor the current year, see Chapter 5, section B, to find out howto report the reserve.

You must report your share of the partnership’s capital gains (orlosses) on the following lines of Schedule G:• line 24, for property other than qualified farm property,

qualified small business corporation shares or resource prop-erty;

• line 48, for resource property that is not classed as qualifiedfarm property or qualified small business corporation shares;

• line 58, for qualified farm or fishing property and qualifiedsmall business corporation shares.

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Chapter 7

Capital gains exemptionIf you are reporting a capital gain, you may be entitled to the$500,000 capital gains exemption, or to an exemptionrespecting resource property.

These exemptions must be reported on line 292 of the incometax return.

A. $500,000 ExemptionThe $500,000 exemption applies to capital gains reported insection C of Schedule G of the income tax return. These arecapital gains realized on qualified farm property, qualifiedfishing property, qualified small business corporation sharesand intangible capital property classed as qualified farmproperty. If you disposed of intangible capital property in theyear, see section G of Chapter 4.

Qualified farm property is the following property that be-longs to you, your spouse, or a family farm partnership inwhich you or your spouse holds an interest:• immovable property (land or buildings) or intangible capi-

tal property (milk or egg production quota) used in afarming business in Canada– by you, your spouse, your child, your father or your mother,– by a family farm corporation or a family farm partnership

in which any of the above-mentioned persons holds ashare or an interest, as applicable;

NOTE: The amount on line 58 gives entitlement to the$500,000 capital gains exemption; the amount on line 48gives entitlement to an additional exemption, as does theportion of the amount on line 58 that relates to resourceproperty, provided the $500,000 exemption has been usedup (see Chapter 7, section B).

Disposition of intangible capital propertyIf a partnership disposed of intangible capital property in thefiscal period, and its eligible intangible capital amount isnegative at the end of that period, the partnership may com-plete the work chart in Chapter 4, section G. The amount on line10 of the work chart must be included in the partnership’sbusiness income, as income derived from the disposition ofintangible capital property; any amount on line 14 is the amountby which this income exceeds the amount recovered withregard to deductions claimed for previous years.

Your share of each amount must be indicated to you by thepartnership. If you have an exempt capital gains balance, youmay use it (without exceeding your share of the excess amount,that is, your share of the amount on line 14) to reduce thebusiness income allocated to you by the partnership. See thenote below.

• a share of the capital stock of a family farm corporation; or• an interest in a family farm partnership.

Such property must have been held and used by the farmingbusiness for a period of at least 24 months immediatelypreceding the disposition.

Qualified fishing property is the following property thatbelongs to you: a fishing licence, an individual quota or afishing boat used in a fishing business. In this context, thecatching of shellfish, crustaceans and marine animals andthe harvesting of marine plants are considered to be activi-ties related to a fishing business.

Such property must have been held and used by the fishingbusiness for a period of at least 24 months immediatelypreceding the disposition.

A qualified small business corporation share is a share thatbelongs to you, your spouse or a partnership of which you area member. In addition, the share had the following charac-teristics throughout the 24-month period immediatelypreceding its disposition:• it was owned by no one other than you, a person related

to you or a partnership of which you were a member;

If you have an interest in a family farm partnership, the partner-ship must allot you a share of the amount indicated on line 27of the work chart, as this amount may entitle you to the capitalgains exemption. Carry the amount of your share to line 86 ofSchedule G (for information purposes).

NOTE: If you have an exempt capital gains balance as aresult of electing to report a capital gain deemed to havebeen realized on February 22, 1994, with respect to yourinterest in the partnership, you may complete form TP-726.7.S-V, Exempt Capital Gains Balance, to determinewhether you can reduce your share of the excess amount.

Disposition of Canadian securitiesIf you were a member of a partnership when the latter disposedof Canadian securities that it owned, you may elect to report asa capital gain or loss your share of any income or loss resultingfrom the disposition of these securities and of all other Cana-dian securities the partnership owns or will own in the future.You may make the election individually, by completing formTP-250.1-V, Election Respecting the Disposition of CanadianSecurities. Under the election, each Canadian security that thepartnership disposed of during a fiscal period is deemed to havebeen disposed of by you, at the end of that fiscal period (seeChapter 4, section C).

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• it was part of the capital stock of a CCPC of which morethan 50% of the FMV of the assets was, as applicable,composed of– assets used principally in an eligible business actively

carried on, primarily in Canada, by the CCPC or by acorporation related to the CCPC,

– certain shares or debts of related corporations, or– a combination of the previous two categories.

You are considered to be related to• any person related to you by blood, marriage or adoption; and• any corporation controlled by you or anyone related to you.

Eligibility requirements and calculation of theexemptionYou are entitled to a capital gains exemption if you meet all ofthe following conditions:• You were resident in Canada, or were deemed to have been

resident in Canada, throughout the year for which you arereporting a taxable capital gain. (You are deemed to havebeen resident in Canada throughout the year if you lived inCanada at some point during the year and throughout thepreceding or following year.)

• You report the capital gain in your income tax return for theyear in which the gain was realized.

• You file your income tax return no later than one year after thefiling deadline.

To calculate the exemption, complete form TP-726.7-V, TaxableCapital Gains Exemption.

The exemption may be reduced by your cumulative netinvestment loss (CNIL), determined as at December 31 ofthe year concerned. Your CNIL is the amount by which theexpenses you incurred after 1987 to earn investment incomeexceed your investment income after 1987. Even if you arenot claiming a capital gains exemption in a given year, youmay be claiming one in a subsequent year. It is therefore agood idea to determine your CNIL every year. To determineyour CNIL at the end of the year, complete form TP-726.6-V,Cumulative Net Investment Loss.

Flow-through entityWith the abolition of the $100,000 capital gains exemption, theconcept of a “flow-through entity” (see definition below) wasintroduced into the Taxation Act. Accordingly, you may havemade an election respecting the securities (for example, units,shares or an interest) that you held in a flow-through entity onFebruary 22, 1994.

A flow-through entity is• a mutual fund trust;• a segregated fund trust;• a trust created to hold shares of the capital stock of a

corporation, where the purpose of the trust is to provide

for the exercise of voting rights attached to those shares;• a trust created for the benefit of creditors in order to secure

certain debt obligations;• a trust created to hold shares of the capital stock of a

corporation for the benefit of its employees;• a trust governed by a profit-sharing plan;• a partnership;• an investment corporation;• a mortgage investment corporation;• a mutual fund corporation.

If you made such an election, you are deemed to have realizeda capital gain on February 22, 1994, with respect to thesecurities. The election, instead of changing the ACB of thesecurities, enables you to create an exempt capital gainsbalance which may be used to reduce• the capital gains allocated to you by the flow-through entity;

and• any capital gain you realize on the disposition of the securities.

If the flow-through entity is a partnership, the exempt capitalgains balance may also serve to reduce your share of businessincome from the disposition of intangible capital property(excluding the portion that constitutes a recovery of the deduc-tions claimed by the partnership for previous years).

You may decide not to use the exempt capital gains balance toreduce your capital gains or your share of business incomefrom dispositions of intangible capital property (other than therecovery of the deductions claimed for previous years), or touse only a portion of the exempt capital gains balance for thispurpose. Any unused balance that remains when you disposeof the securities (or the residual portion thereof) is added tothe ACB of the securities. Please note, however, that you willnot be able to use your exempt capital gains balance afterthe 2004 taxation year.

You may use form TP-726.7.S-V, Exempt Capital Gains Balance,to calculate the capital gains reduction and, if applicable, thereduction of the business income derived from the disposition ofintangible capital property. You may wish to complete the formsimply to keep track of your exempt capital gains balance fromyear to year.

B. Capital gains exemptionrespecting resource property

You may be entitled to an exemption with regard to the capitalgains you realized on the disposition of resource property if youmeet all of the conditions listed in section A. If the propertyconcerned is qualified farm property or qualified small businesscorporation shares, you may not claim this additional exemptionunless you have used up the $500,000 capital gains exemption.

In 2001, a new refundable tax credit for corporations wasintroduced to replace the system of flow-through shares, which

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currently allows a corporation to renounce its resource expensesin favour of investors. This measure will end on January 1, 2005.However, capital gains realized on resource property (definedbelow) will continue to give entitlement to an exemption.

Calculate the exemption on form TP-726.20.2-V, Capital GainsExemption Respecting Resource Property. Since the capitalgains exemption has been abolished with respect to flow-through shares acquired after June 12, 2003, you may nolonger take into account any exploration expenses incurred inQuébec with respect to these shares.

The term “resource property” refers to• a flow-through share issued before June 13, 2003 (or after

June 12, 2003, further to an investment made no later thanthat date, or further to an application for a receipt for afinal prospectus or for an exemption from filing a prospec-tus, made no later than that date);

• an interest in a partnership that invested in flow-throughshares as described in the previous point, or an interest ina partnership that incurred, after May 14, 1992, Canadianexploration expenses or Canadian development expenses,where the interest was acquired by an individual after

May 14, 1992, but before January 1, 2002, as part of apublic issue of securities in respect of which the receipt forthe final prospectus (or the exemption from filing a pro-spectus) was obtained between the aforementioned dates;

• property substituted for a flow-through share or for aninterest in a partnership described in the first and secondpoints above (see the definition of “substituted property”below).

The term “substituted property” refers to property• that was acquired by an individual

– pursuant to an election made upon the transfer of prop-erty to a corporation or partnership, or upon the disso-lution of a partnership,

– pursuant to the winding-up of a subsidiary of a Cana-dian corporation, or

– by reason of the amalgamation of Canadian corpora-tions; and

• that the individual has elected to designate as resourceproperty. The election must be made in a letter enclosedwith the individual’s income tax return for the year inwhich the substituted property was acquired.

If, for a given taxation year, you sustained a capital loss on thedisposition of property, read section A below to determinewhether the loss is deductible. If it is, read section B to find outhow to apply the deduction.

A. DeductibilityDepreciable property and personal-useproperty other than precious propertyA capital loss cannot result from the disposition of depreciableproperty (see section B below) or from the disposition ofpersonal-use property that is not precious property (see Chap-ter 4, section D).

Precious propertyPrecious property is personal-use property such as prints, etch-ings, drawings, paintings, sculptures and other similar works ofart, as well as jewellery, stamps and coins, and rare folios,books and manuscripts.

A loss on the disposition of precious property may be deductedonly from a gain on the disposition of other precious property.However, you cannot deduct such a loss from a gain on preciousproperty that is classed as cultural property, since gains on thedisposition (sale, donation, etc.) of cultural property are nottaxable.

Chapter 8

Deduction of capital losses

Cultural propertyLosses on the disposition of cultural property are deductible insome cases. If the cultural property is personal-use propertybut not precious property, the loss is not deductible. If thecultural property is precious property, see the preceding para-graph.

Bad debt or shares of a bankrupt orinsolvent corporationDebtsYou may deduct a capital loss on a debt (or other right toreceive an amount) only if you acquired the debt (or right)• in order to earn business or property income, other than tax-

exempt income; or• in exchange for capital property (see definition in Chapter

1) that you disposed of in favour of a person with whom youwere dealing at arm’s length.

Furthermore, where a debt (as defined above) owing to you atthe end of the year is a bad debt (i.e., has become uncollectibleduring the year), you may make an election under which youare deemed to have disposed of the debt for an amountequal to zero, provided you enclose with your income taxreturn a letter informing the Ministère that you are making the

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election under section 299 of the Taxation Act. You are thendeemed to have sustained a capital loss for the year equal to theamount of the debt. If the bad debt results from the dispositionof personal-use property, the loss you claim must not exceed thecapital gain you reported on the disposition of the personal-useproperty.

Shares of a bankrupt or insolvent corporationIf, at the end of the taxation year, you held a share of the capitalstock of a corporation that went bankrupt during the year, youare deemed to have disposed of the share at that time forproceeds equal to zero, provided you make an election to thiseffect in your income tax return for the year (you must specifythat you are making an election under section 299 of theTaxation Act). This is also the case if you held a share of thecapital stock of an insolvent corporation that was wound upduring the year, or of a corporation that was insolvent at the endof the year and that meets the following conditions:• Neither the corporation nor a corporation controlled by it

carries on a business.• The FMV of the share is zero.• It is reasonable to expect that the corporation will be dis-

solved or wound up and will not resume carrying on abusiness.

This election cannot be made with regard to a share that youreceived as consideration for the disposition of personal-useproperty.

NOTE: A loss that you sustain on the disposition of a shareor a debt may, under certain circumstances, constitute abusiness investment loss (which is deductible from incomefrom all sources), rather than a capital loss (which is deduct-ible only from capital gains). For further information, seeChapter 9.

Transactions involving a person affiliatedwith you

Non-depreciable propertyA loss sustained on non-depreciable property is considered asuperficial loss if the following conditions are met:• During the period that begins 30 days before and ends 30

days after the disposition of a particular property, you or aperson affiliated with you acquired replacement property(property that is, or is identical to, the particular property) orhad a right to acquire it. See the definitions of “personaffiliated with you” and “identical property” below.

• At the end of that period, you or the person affiliated with youstill owned the replacement property or had the right toacquire it.

A superficial loss cannot be deducted; it must be added to theACB of the replacement property acquired by you or the affili-ated person.

As a rule, where a share you owned is bought back from you bythe issuing corporation, and the corporation is affiliated withyou immediately after the transaction, the loss is not deductible.The ACB of each share you held immediately after the transactionis increased by the result of the following calculation:

FMV of the share immediatelyafter the transaction

Amount of the loss xFMV of all your shares

in the corporation immediatelyafter the transaction

ExceptionsThese rules do not apply to losses sustained in the followingsituations:• You are deemed to have disposed of the property further to

your death or immigration to or emigration from Canada, orfurther to a change in use of the property.

• The property is a stock option that you are deemed to havedisposed of because it has expired.

• The property is a debt that you are deemed to have disposedof because it has become a bad debt, or the property is a sharethat you are deemed to have disposed of because the corpo-ration that issued the share went bankrupt or was insolventat the time it was wound up.

• Within 30 days after the disposition of the property, youbecame exempt from (or ceased to be exempt from) Québecincome tax.

Depreciable propertyIf you sustained a loss on the disposition of depreciable prop-erty, and the transaction involved a person affiliated with you(see definition below), a deferral mechanism applies. Theexceptions to this rule are the same as those listed above withrespect to non-depreciable property.

ConditionsUpon the disposition of depreciable property, the lower of thefollowing amounts exceeds the proceeds of disposition*:

– the capital cost of the property;– the amount obtained by the following formula: A x B C,

whereA is the UCC of all the property in the same class, immedi-

ately before the disposition;B is the FMV of the property at the time of disposition; andC is the FMV of all the property in the same class, immedi-

ately before the disposition.

On the 30th day following the disposition, you or a personaffiliated with you owned the property in question, or had theright to acquire it (unless the right was a guarantee, such as amortgage).

* As you are not dealing at arm’s length with the transferee, theproceeds of disposition are deemed to be equal to the FMV ofthe property at the time of disposition, provided you disposedof the property for proceeds equal to zero or for an amountlower than the FMV at the time of disposition.

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RulesIf the property in question is the only property in its class, youare not allowed to claim a terminal loss because

• you are deemed to have disposed of the property forproceeds equal to the lower of the amounts referred toabove;

• for the class to which the property in question belonged,the excess amount referred to above is added to the UCCat the beginning of your taxation year and consequentlygives entitlement to capital cost allowance. If you do nothave any property left in the class at the earliest of thetimes specified below, you may deduct as a terminal lossany portion of the excess amount that you have notclaimed as capital cost allowance:– the beginning of a 30-day period throughout which you

or a person affiliated with you no longer owns or has aright to acquire the property in question;

– the time at which you or a person affiliated with youceases to use the property to produce income;

– the time at which, because of your emigration from orimmigration to Canada, you would be deemed to haveagain disposed of the property if you still owned it.

In this guide, a person affiliated with you may be one of thefollowing persons:• yourself;• your spouse;• a corporation controlled directly or indirectly, in any man-

ner whatsoever, by you, your spouse or a group of affiliatedpersons to which you or your spouse belongs;

• a partnership in which you are a majority interest partner.

For the purposes of the above definition,• a partnership is considered to be a person;• a group of affiliated persons is a group of persons each of

whose members is affiliated with each other member;• a majority interest partner is a partner that holds a majority

interest in the partnership at a given time, that is, a partner– whose share of the partnership’s income from all sources

for the fiscal period of the partnership that ended beforethat time (or, in the case of a new partnership, thepartnership’s first fiscal period that includes that time)would have exceeded 50% if the partner had heldthroughout that fiscal period the same interest that he orshe (or a person with whom he or she was affiliated) heldat that time; or

– who, if the partnership were dissolved at that time,would receive (jointly with every person with whom he orshe was affiliated) more than 50% of the amount thatthe partnership would pay otherwise than as a share ofits income.

The term “identical property” refers to a property that issimilar to another property in all aspects deemed important(for example, the type of property, the class to which itbelongs, or the rights conferred on the holder of the prop-erty). Identical property includes the right to acquire theother property.

B. Applying the deductionCapital losses sustained during the year may be deducted onlyfrom capital gains realized during the same year (not from othertypes of income). If the result is a positive amount, this amountconstitutes a net capital gain; the taxable portion of this gainmust be included in your income. If the result is a negativeamount, the deductible portion of this amount constitutes anet capital loss. You may apply the amount of a net capitalloss against any taxable capital gains you realized in theprevious three years; any balance that remains may be carriedto a subsequent year, provided you realized a taxable capitalgain in that year.

The amount of your taxable capital gains or net capital loss isshown on line 98 of Schedule G.

To carry a net capital loss to one of the previous three years,complete form TP-1012.A-V, Carry-Back of a Loss Sustained,and submit it to the Ministère no later than the filing deadlinefor the income tax return pertaining to the year in which the losswas sustained. To carry a loss to a subsequent year, completeform TP-729-V, Carry-Forward of Net Capital Losses.

The amount of the loss you are carrying over must be entered online 290 of your income tax return for the year to which the lossis applied.

Order in which net capital losses mustbe carried overYou must apply your earliest capital loss to your earliest capitalgain. For example, if you sustained a capital loss in 2001 andagain in 2003, and you wish to use these losses to reduce yournet capital gains for 1999, 2000 and 2002, you must begin byapplying your 2001 loss against your 1999 gain. Any portion ofthe loss that is not absorbed by the gain for 1999 should be usedto reduce the gain for 2000 and then, if applicable, to reduce thegain for 2002. Once your entire capital loss for 2001 has beenapplied against capital gains, you may begin to use your capitalloss for 2003 to reduce your capital gains for other years.

Resumption of business activities by an insolventcorporation or a related corporationIf, at the end of a given taxation year, you sustain a capital losson the disposition of a share of the capital stock of a corporationthat has become insolvent and, at any time in the 24-monthperiod following the disposition,

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• the corporation (or a corporation controlled by it) begins tocarry on a business, and

• you or a person with whom you are not dealing at arm’slength holds the share,

Chapter 9

Business investment losses

you or that person, as applicable, must consider the loss to bea capital gain realized in the taxation year in which one of theaforementioned corporations begins to carry on a business.

A business investment loss is a loss resulting from thedisposition of• a share of the capital stock of a small business corporation;

or• a debt owed by a small business corporation or by a CCPC that

– went bankrupt while carrying on a small business, or– was insolvent, and was carrying on a small business at the

time it was wound up.

Since business investment losses are generally capital losses,see also the section of Chapter 8 entitled “Bad debt or sharesof a bankrupt or insolvent corporation.”

A small business corporation is, at a given time, a CCPC allor substantially all (at least 90%) of the FMV of whose assetsis attributable, at that time, to assets that are• used principally in an eligible business (see definition

below) carried on primarily in Canada by the corporation ora corporation related to it;

• shares or debts of a corporation that is connected with thecorporation and that is itself a small business corporation;or

• a combination of the assets described in the previous twopoints.

To be considered a small business corporation at a given timefor the purposes of a business investment loss, a corporationmust have been a small business corporation at some pointduring the 12 months preceding that time.

An eligible business is any business carried on by a taxpayerresident in Canada, other than a specified investment busi-ness or a personal services business.

Deductible amount of the lossIf you make an election under section 299 of the Taxation Act,you are deemed to have disposed of the debt or the share at theend of the year in question for proceeds equal to zero, and tohave reacquired the debt or share immediately thereafter at acost of zero. Consequently, the amount of the loss is equal tothe amount of the debt or to the ACB of the share, immediatelyprior to the time of the deemed disposition. If the debt resultsfrom the disposition of personal-use property, and you are

dealing at arm’s length with the corporation concerned, the lossmay not exceed the capital gain you reported on the dispositionof the personal-use property.

You may deduct only the allowable portion of your total busi-ness investment losses for the year. Unlike capital losses, whichcan be applied against capital gains only, business investmentlosses can be deducted from your income from all sources.

As a rule, the allowable portion is calculated only after subtract-ing of any taxable capital gains exemption you claimed for aprevious year and taking the inclusion rate into account. Com-plete form TP-232.1-V, Allowable Business Investment Loss.

Loss carry-overIf your business investment loss for a given year exceeds yourincome, the difference may be carried back three years andforward seven years.

You may wish to use form TP-1012.A-V, Carry-Back of a LossSustained, to calculate the balance to be carried over withrespect to a loss sustained in a given year. If you elect to carrythe balance to a year preceding the year of the loss, you arerequired to file the form and must do so no later than the filingdeadline for the income tax return for the year in which yousustained the loss.

If you have more than one balance to carry over to a given year,you must begin with the earliest loss (for instance, you mustcarry over the balance of a loss sustained in 2000 before youcarry over the balance of a loss sustained in 2002).

Resumption of business activities by an insolventcorporation or a related corporationIf, at the end of a taxation year, you sustain a businessinvestment loss because the corporation of which you held ashare is insolvent and, within the next 24 months,• the corporation (or a corporation controlled by it) begins to

carry on a business, and• you or a person with whom you are not dealing at arm’s

length holds the share,you or that person, as applicable, must consider the loss to bea capital gain realized in the taxation year in which one of theaforementioned corporations begins to carry on a business.

GatineauDirection régionale de l’Outaouais170, rue de l’Hôtel-de-Ville, 6e étageGatineau (Québec) J8X 4C2(819) 770-1768 or 1 800 267-6299

JonquièreDirection régionale du Saguenay–Lac-Saint-Jean2154, rue DeschênesJonquière (Québec) G7S 2A9(418) 548-4322 or 1 800 267-6299

LavalDirection régionale de Laval,des Laurentides et de Lanaudière4, Place-Laval, bureau RC-150Laval (Québec) H7N 5Y3(450) 972-3320 or 1 866 540-2500

LongueuilDirection régionale de la MontérégiePlace-Longueuil825, rue Saint-Laurent OuestLongueuil (Québec) J4K 5K5(450) 928-8820 or 1 866 490-2500

Montréal• Direction régionale de Montréal-Centre

Complexe DesjardinsC. P. 3000, succursale DesjardinsMontréal (Québec) H5B 1A4(514) 873-2600 or 1 866 440-2500

• Direction régionale de Montréal-EstVillage Olympique, pyramide Est5199, rue Sherbrooke Est, bureau 4000Montréal (Québec) H1T 4C2(514) 873-2610 or 1 866 460-2500

• Direction régionale de Montréal-OuestLes Galeries Saint-Laurent2215, boulevard Marcel-LaurinSaint-Laurent (Québec) H4R 1K4(514) 873-6120 or 1 866 570-2500

QuébecLocal office200, rue DorchesterQuébec (Québec) G1K 5Z1(418) 659-6299 or 1 800 267-6299

RimouskiDirection régionale du Bas-Saint-Laurentet de la Gaspésie–Îles-de-la-Madeleine212, avenue Belzile, bureau 250Rimouski (Québec) G5L 3C3(418) 727-3572 or 1 800 267-6299

Rouyn-NorandaDirection régionale de l’Abitibi-Témiscamingueet du Nord-du-Québec19, rue Perreault Ouest, RCRouyn-Noranda (Québec) J9X 6N5(819) 764-6761 or 1 800 267-6299

Saint-Jean-sur-RichelieuLocal office for the Montérégie region855, boulevard IndustrielSaint-Jean-sur-Richelieu (Québec) J3B 7Y7(450) 349-1120 or 1 866 470-2500

Sainte-FoyDirection régionale de la Capitale-Nationaleet de la Chaudière-Appalaches3800, rue de MarlySainte-Foy (Québec) G1X 4A5(418) 659-6299 or 1 800 267-6299

Sept-ÎlesDirection régionale de la Côte-Nord391, avenue Brochu, bureau 1.04Sept-Îles (Québec) G4R 4S7(418) 968-0203 or 1 800 267-6299

SherbrookeDirection régionale de l’Estrie2665, rue King Ouest, 4e étageSherbrooke (Québec) J1L 2H5(819) 563-3034 or 1 800 267-6299

Sorel-TracyLocal office for the Montérégie region101, rue du RoiSorel-Tracy (Québec) J3P 4N1(450) 928-8820 or 1 866 490-2500

Trois-RivièresDirection régionale de la Mauricieet du Centre-du-Québec225, rue des Forges, bureau 400Trois-Rivières (Québec) G9A 2G7(819) 379-5360 or 1 800 267-6299

More offices to serve you better

Information service for persons with a hearing impairment:Montréal: 873-4455 Elsewhere in Canada: 1 800 361-3795

We invite you to visit our Web site at www.revenu.gouv.qc.ca.

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IN-120-V (2003-12)