Capital property

Whether a sale is taxed as a capital gain or as income starts with this label. Section 54 defines capital property of a taxpayer as any depreciable property, plus any other property whose disposition would be a capital gain or a capital loss of the taxpayer. Subsection 248(1) points to that section. Because the definition turns on how a gain would be classed, the facts of each asset matter.

Where the line falls

The CRA’s capital gains guide says capital property does not include the trading assets of a business, such as inventory. It says a capital gain arises when capital property is sold for more than the total of its adjusted cost base and the outlays and expenses incurred to sell it. Depreciable property is one kind of capital property and has its own entry.

What to ask

• Which assets in the sale are inventory and which are capital property
• How the price is allocated across those assets, and who prepared the allocation
• Whether any asset was treated as depreciable property in earlier returns
• How the seller’s accountant classes an asset if its status as capital or income is in doubt

For how a gain on capital property is taxed on a sale, see how capital gains are taxed when you sell a business.