Are your Gains and Losses Capital or Income when disposition property?

When you decide to dispose and / or deemed disposition of property, most taxpayer have gains or losses from the sale of property and are treated as capital gains or losses. This means only 50% of the gains are taxed instead of 100%. A capital losses can only be used to reduce or eliminate capital gains. On the other hand, some taxpayer who have gains or losses are determined to be business income, not capital. This means 100% of the gains are taxed, and 100% of a losses are deductible. The business losses are deductible from other income. The following factors need to be considered in determining whether a disposition is on account of income or capital:

  • relationship of the transaction to the taxpayer’s business- if the transaction is very similar to the taxpayer’s normal course of business, it will be considered business income
  • activity or organization normally associated with trade- need to consider how the transaction  was organized, nature of activity, etc. If the transaction is ” an adventure in the nature of trade”, it will be considered business income
  • nature of assets involved- sale of fixed assets (capital transaction) or inventory (business income)
  • number and frequency of transactions by the same taxpayer in a given period of time- a relatively large number of transactions may indicate that the taxpayer is involved in a business activity
  • length of period of ownership of the asset- the shorter the period, the more likely the disposition will give rise to business income
  • circumstances that caused the disposition- unsolicited offers resulting in a sale, or sales motivated by a need for fund, appear more capital in nature
  • stated objects of the organization as outlined in the articles of association or incorporation or a partnership agreement

 

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