Capital Gains vs Business Income

As indicated in our previous articles, the housing market in Canada has attracted many investors. This has allowed real estate investors to make a quick profit. The popularity has also been fueled by the preferred tax treatment on capital gains. In Canada only 50% of the capital gain is taxable at your marginal tax rate.This has allowed taxpayers to shelter large portion of their income from the tax man. However, you should be aware that not all income qualifies as a capital gain. It could be taxed as business income, in which case 100% of the amount is subject to tax.

For example, to determine if the rental income qualifies as a capital gain or business income the following Six factors are considered as cited in Ayala v. The Queen:

1. The nature of the property sold;
2. The length of time the taxpayer was in possession as owner of the property;
3. The frequency and number of operations carried out by the taxpayer;
4. The improvements made by the taxpayer to the property;
5. The circumstances surrounding the sale of the property; and
6. The taxpayer’s intention at the time the property was acquired, as indicated by the taxpayer’s actions.

In the case of Montreal tax payer who sold six of her real estate properties and reported the income as a capital gain, her appeal was denied and income was assessed as business income. The judge in this case concluded that the Montreal taxpayer was probably and likely had acquired the properties “for the purpose of reselling them at a profit at the earliest opportunity rather than considering them as long‑term investments.” The taxpayers appeal was denied and her income assessed as business income forcing her to pay tax on 100% of the sale proceeds.

These rulings will impact many different business and industries. It is critical taxpayers seek adequate legal and tax advise when making decisions.

Capital Losses vs Business Losses 

When it comes to capital losses vs business losses the opposite is also true. A capital loss can only be applied to reduce a capital gain. However, a business loss has more flexibility and it can be applied to reduce a capital gain or other income. Read our article on capital losses vs business losses to gain more insight.

SDVC LLP – Chartered Professional Accountants  is an accounting firm located in Mississauga, Ontario. Serving the needs of Small Business Owners & Entrepreneurs. Contact us for Tax Help, Personal Tax, Corporate Tax, Year End Financials, Review Engagements, Audit Engagements, Accounting & Estate Taxes.