Question #1 – Tax (capital gains)

Jonathan disposes of a number of belongings during the calendar year. He sold a rare manuscript for $1,000 (the original cost was $1,200). He also sold two vehicles: the first was an antique car for $30,000 (the original cost was $25,000) and the second was a car he used daily for the past 10 years. The second car originally cost $20,000 and sold for $2,000. Jonathan has no allowable capital losses to carry forward from previous years.
In his stock portfolio, Jonathan sold shares of ABC Inc. and received proceeds of $10,000. The ACB was $14,000.
Which of the following statements is correct?
  1. At the end of the year Jonathan will have a capital loss of $16,800 to carry forward.
  2. At the end of the year Jonathan will have neither a capital loss nor a capital gain to report as they cancel each other out.
  3. Jonathan will report a taxable capital gain of $500.
  4. Jonathan will report a capital gain of $800.

Solution:

In order to get this question correct it is imperative to identify the different categories of assets and the characteristics of each category. The rare manuscript (sold at a loss) falls into the listed personal property (LPP) category whereas the cars fall into the personal use property (PUP) category. Losses incurred in the LPP category cannot be used to offset gains in any other category whereas all losses in the PUP category are disallowed. The loss from the shares which fall into “other capital property” can be used to offset gains in any category.

  • Shares: loss of $4,000
  • Antique car: gain of $5,000
  • Daily use vehicle: loss is disallowed
  • Shares: loss of $4,000 (which can be applied to other gains)
  • Rare manuscript: the loss of $200 can only be used if a gain is made on other LPP assets within the next 7 years (or the 3 previous years).
CG: $5,000 – $4,000 = $1,000. The taxable capital gain is 50% of $1,000 = $500.