What Are Proceeds of Disposition for Canadian Taxes?

When you dispose of capital property like real estate or stocks, the “proceeds of disposition” is the starting point for determining your tax obligation. This figure represents the total value you received, or are considered to have received, for the property. The proceeds are a key component in calculating a capital gain or loss, which determines the income you must report to the Canada Revenue Agency (CRA).

Determining the Proceeds of Disposition

The most common example of proceeds of disposition is the sale price you receive for a property. This is the gross amount you are entitled to from the transaction. The concept also extends beyond cash sales to include compensation for property that was destroyed, expropriated by a government body, or stolen. For instance, an insurance payout for a destroyed asset is considered your proceeds of disposition.

Proceeds are not limited to cash payments. If you trade one property for another, your proceeds of disposition is the fair market value of the property you receive in the exchange. This value is determined at the time of the transaction to ensure the total value obtained is accounted for.

In some cases, you are deemed to have received proceeds even without a sale. If you gift property to a non-arm’s-length individual, like a family member, you are considered to have received proceeds equal to the property’s fair market value. This rule prevents tax avoidance by transferring assets for less than their worth.

Special Rules for Deemed Dispositions

Canadian tax law sometimes considers a property disposed of even without a sale, which is known as a “deemed disposition.” This ensures that accrued gains on property are taxed at appropriate times. In these cases, the proceeds of disposition are established as the fair market value (FMV) of the property at the time of the event.

A common trigger for a deemed disposition is the death of a taxpayer. Upon death, an individual is considered to have disposed of all their capital property for proceeds equal to its FMV. This can trigger a capital gain on the deceased’s final tax return, though exceptions exist, such as a tax-deferred rollover when property is transferred to a surviving spouse.

Another trigger is ceasing to be a resident of Canada for tax purposes. This “departure tax” means the individual is deemed to have sold certain property at its FMV on their date of emigration. This allows Canada to tax gains that accrued while the person was a resident, though some properties like Canadian real estate are exempt.

A change in a property’s use can also result in a deemed disposition. For example, if you convert your principal residence into a rental property, you are deemed to have disposed of it at its FMV and immediately reacquired it for the same amount. This establishes a new cost base for the property as a rental, and any gain accrued up to that point may be subject to tax, though the principal residence exemption could reduce this gain. The reverse is also true when converting a rental to a principal residence.

Calculating the Capital Gain or Loss

To calculate a capital gain or loss, you subtract the Adjusted Cost Base (ACB) and any selling expenses from the proceeds of disposition. The ACB is the original cost to acquire the property plus related expenses like legal fees. Outlays and expenses are the costs associated with the sale, such as brokerage fees. The formula is: Proceeds of Disposition – (ACB + Outlays and Expenses) = Capital Gain or Loss.

Only a portion of a capital gain is included in your income. This taxable portion is set by the capital gains inclusion rate. As of June 25, 2024, the inclusion rate is 50% on the first $250,000 of capital gains for individuals annually, and two-thirds (66.7%) on gains exceeding that threshold. For corporations and trusts, the two-thirds inclusion rate applies to all capital gains.

For example, if you sold shares for $15,000 (proceeds of disposition) with an ACB of $10,050 and selling expenses of $50, your capital gain is $4,900. If this gain is under the $250,000 threshold, the 50% inclusion rate applies. The taxable capital gain reported on your return would be $2,450.

The Lifetime Capital Gains Exemption (LCGE) can eliminate tax on the disposition of qualified small business corporation shares or qualified farm or fishing property. The LCGE allows for a certain amount of capital gains to be realized tax-free. As of June 25, 2024, the LCGE limit was increased to $1.25 million.

If your calculation results in a capital loss, it cannot offset other income sources like employment income. A capital loss can, however, reduce or eliminate capital gains from the same year. A net capital loss can be carried back three years or carried forward indefinitely to apply against other capital gains.

Reporting on Your Tax Return

You must report all capital gains or losses on your annual income tax return. This is done using Schedule 3, Capital Gains (or Losses), which is filed with your T1 General Income Tax and Benefit Return. This schedule details all dispositions of capital property for the tax year.

Schedule 3 is divided into sections for different property types, such as publicly traded shares, mutual funds, and real estate. The form guides you through the calculation to determine your total capital gain or loss for the year.

After completing Schedule 3, the final taxable capital gain is transferred to your T1 General return. This amount is included in your total income and taxed at your marginal rate. If you have a net capital loss, your notice of assessment from the CRA will show the loss amount available to carry to other years.