September 2019 Newsletter

This month we offer you a quiz to test your tax knowledge in various areas relating to your personal tax planning. You might find some useful ideas here!

We’ve put the answers separately, so you can try the questions on your own (without peeking at the answers) and see how well you score. Try to explain your answers to yourself, along with any related planning points that must be considered.

  1. You sell some shares on the stock market for $12,000 more than you paid several years ago. What portion of the $12,000 gain is included in your income and subject to tax?
  1. You sell some shares on the market this month for $12,000 less than you paid several years ago. Your only income this year is $65,000 of employment income. Can you deduct the capital loss?

A “bare trust” is an interesting concept that can be useful for tax purposes. Unlike a real trust, a “bare trust” is one where person T (the bare trustee) holds legal title to property for person O (the owner), but does not have any discretion as to what to do with it. T must simply transfer or deal with the property as O directs, and has no independent powers or responsibilities. A bare trust arrangement can be set up with a simple one-page agreement specifying these conditions.

A bare trust is often used for holding real property. For example, a numbered company might be used as the registered owner of land, to hide the name of the real owner from public view. The term “nominee” is also used for a bare trustee. T may also be called the “agent” of O, again just acting on O’s instructions. (Technically a bare trust and an agency are different legal concepts, but in practice they may be the same thing.)

CRA controls its audit process, and the Courts won’t intervene

It’s been well established, in Court cases over many years (e.g., Main Rehabilitation Co., 2004 FCA 403), that if you’re appealing an income tax (or GST/HST) assessment, the only issue the Tax Court of Canada can address is whether the assessment is legal and correct. How the CRA behaved during the audit process doesn’t matter. Even if the auditor acted unreasonably, once you’ve been assessed you have to show the Tax Court why the assessment is wrong, and the auditor’s actions are irrelevant. (And if the assessment is for GST/HST or source deductions, CRA Collections will force you to pay the assessment even while you’re appealing, long before you can get to the Tax Court.)

So what do you do if a CRA auditor is acting unreasonably – say, by proposing an assessment that is clearly wrong?

Here are the answers to the quiz.

  1. One-half of a capital gain is taxable. That is, half of the gain is your “taxable capital gain”, which is included in income for tax purposes. Unless you do so much trading that you’re considered to be carrying on a business of stock trading, the $12,000 gain is a capital gain, and $6,000 will be included in your income and taxable.

     However, all commissions you originally paid to buy the stock, as well as those you pay to sell the stock, are deducted when you calculate the gain. So if you paid $200 commission when buying the stock and $400 when selling it, your capital gain is actually $11,400, and the amount to be included in your income for tax purposes will be $5,700.

  1. No. You have an allowable capital loss of $6,000 (one-half of the capital loss), or perhaps something like $5,700 if you paid commissions on the purchase and sale as in #1 above. However, you cannot use an allowable capital loss against employment income, or against any other income other than taxable capital gains.

     If you had taxable capital gains in any of the previous three years, you can carry back your allowable capital loss and use it against those gains. If not, you can carry forward your allowable capital loss indefinitely, and apply it in any future year, but only against taxable capital gains.