Capital Gains Versus Business Income

Capital gains are taxed differently than other income including business income. Capital gains are taxed based on 50% of the gain, giving an individual taxpayer an advantage or tax break. Click HERE for tax rates for individuals and corporations on capital gains and business income. Sometimes individual taxpayers try to arrange their affairs to claim capital gains as opposed to other types of income. A common example would be a real estate agent who regularly buys and sells property personally and claiming capital gains treatment.

This strategy and others like it probably won't be accepted by CRA. In determining whether a transaction is capital or regular income, CRA will apply general criteria outlined in various court cases. They are as follows:

1. Intention and course of conduct. Did the taxpayer have the intent of earning income during the period of ownership as opposed to turning a profit on the sale.

2. Secondary intention. While the primary intention was to use the property to earn income during the period of ownership, the taxpayer may have had the secondary intention of realizing a profit on the sale. Usually this criteria is used when the taxpayer had insider information so that the taxpayer was virtually assured of realizing a profit on sale.

3. The number and frequency of transactions. The more often an activity is carried on, the more likely the gains are normal income.

4. Relationship to the ordinary business endeavours of the taxpayer. For example a real estate agent who ventures in buying and selling property.

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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