Capital gain versus business income

The Income Tax Act defines a business broadly, to include a trade or undertaking of any kind and, subject to the exceptions listed in section 248(1), an adventure or concern in the nature of trade, but not an office or employment. Capital property is a separate idea, with its meaning set by section 54.

What the CRA says

The CRA’s capital gains guide (T4037) says capital property does not include the trading assets of a business, such as inventory. It also gives examples where the sale of a depreciable asset produces a recapture of capital cost allowance that must be included in business income. For a housing unit that is not flipped property, the guide says whether the profit is business income or a capital gain depends on the specific details of the situation, with Form T2125 used if it is business income.

What to ask

• Which assets in the deal are capital property and which are inventory.
• Whether any asset has a recapture of capital cost allowance.
• Whether an accountant has confirmed the treatment before closing.

See how inventory is treated in a business sale and the related term proceeds of disposition.