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Only 50% of capital gains and losses realized are recognized in calculating taxable income. |
Capital losses can generally only be deducted to the extent you have realized capital gains in the year. Capital losses may also be carried back three years or forward indefinitely to offset taxable capital gains that have been realized in other years (to the extent that your 2010 capital losses exceed capital gains).
Review your asset sales for the year to determine your net capital gain/loss position, and consider the following planning points.
Utilize your capital gains exemption for qualified small business corporation shares and qualified farm/fishing property
A $750,000 ($500,000 prior to March 19, 2007) capital gains exemption is available for capital gains from qualified small business shares, qualified farm property and for dispositions on or after May 2, 2006, qualified fishing assets. If you own such assets with accrued gains, you can trigger the gain by means of an actual sale to a third party, or by transferring the asset to your spouse (if you elect to transact at fair market value) or to a corporation you control. Before doing so, you should consult with your BDO advisor to ensure that any gain will qualify for the exemption. Note that if you previously triggered a $500,000 gain, it may make sense to enter into a similar arrangement to use up the additional $250,000 exemption amount that became available on March 19, 2007.
Defer capital gains where proceeds reinvested in a small business corporation
If you own shares of a small business corporation and dispose of the shares, recognition of the capital gain may be deferred if you reinvest the proceeds from the sale of those shares in another small business corporation. There are several conditions that must be met to be eligible to defer the capital gain. You should consult with your BDO advisor to determine if you are eligible for the deferral.
Consider selling investments with accrued losses before the end of the year
If you’ve realized capital gains in the year, consider selling assets with an accrued loss to offset the gains. You may also want to realize the loss if you’ve had capital gains in the last three years that weren’t offset by your capital gains exemption.
Note that rules (known as the stop-loss rules) apply to deny losses on certain dispositions of property, such as:
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where you transfer an asset to your spouse or a corporation controlled by you and/or your spouse; or
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where you sell an asset on the open market, and you, your spouse or a corporation controlled by you or your spouse reacquires it within 30 days of its disposition.
Note that these stop-loss rules will also apply where you sell or contribute an asset to your RRSP or TFSA at a loss (or your spouse’s plan) or where you sell an asset at a loss and that asset is repurchased in an RRSP or TFSA belonging to you or your spouse within 30 days.
These rules are complex and can apply in situations not discussed here, so consult with your BDO advisor. As well, read our Tax Factor 2008-02 article “Tax Rules to Remember When Triggering Capital Losses”.
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