Duhaime's Law Dictionary


Capital Gain Definition:

The eventual, net proceeds of sale of an asset, subtracting the original purchase price from the sale price.

Capital gain or capital gains is an accounting term but one with substantial relevance to tax law as jurisdictions are wont to tax capital gains when the capital asset is sold or otherwise disposed of, just as tax-payers would then seek tax credit or deduction in the event that, in lieu of a capital gain, the tax payer suffered a capital losses.

Therefore, to the extent that it is not expressly defined in a tax statute, what is or is not a capital gain has become a matter of judicial interpretation, often hotly contested as the tax authority seeks to capture transactions as capital gains, and the tax payer seeks to avoid the designation. The law reports contain complex decisions on the status as capital gains of lottery winnings, royalties, business income and many creative tax avoidance transactions.

In T. Eaton, Justice Robertson of the Canadian Federal Court of Appeal wrote:

"[C]apital gain or loss is a gain or loss arising from a disposition of property."

In Wood v MNR, Justice Gibson held:

"Capital gains in the main arise from capital assets. Buying and selling such income producing rights as corporate securities, real estate, leases and contracts and disposing of these assets at prices higher than the original cost produce gains which are not related to the income flows associated with these assets. Capital gains from increases in land values, from investment in the stock market and from the creation and expansion of industrial empires are the most well known sources of such capital gains.

"The unexpected nature of a capital gain is the main thing that most economists stress in expressing the conceptual difference between capital gains and ordinary income.

"In other words, they say that the expected rise in the value of an asset is ordinary income and an unexpected rise in value is a capital gain....

"Pure capital gains are windfall additions on one's assets or ... unforeseen increases in the real value of a man's existing property not directly attributable to his efforts, intelligence, capital or risk-taking.

"In law, however, the meaning of capital gain is not as refined and narrow as the economist's concept. In law, as the cases indicate, a capital gain is not always completely unanticipated and it is often a mixture of the other types of factor returns — wages, rents, interest and profits."

The United States Court of Appeal, Justice Sobeloff wrote, in Pridemark:

"A capital gain represents an appreciation in value accruing over a prescribed period of time on the investment of money in property."

capital gainIn Steeves, Justice Dubé wrote:

"Jurisprudence has developed several tests to determine whether a gain is capital or income.... Is the subject matter normally the subject of trading and very exceptionally the subject of investment? How long has the property been held? How frequent the same type of transactions by the same person? Has the property been worked up during ownership so as to make it more marketable? Has the opportunity to transact emerged suddenly? What was the motive behind the acquisition of the asset? The secondary intention? Was it an investment, or essentially a speculation? Is the transaction part of a profit-making scheme? Did the purchaser deal with the property in the same way as a dealer would? How remote were the possibilities of realizing a profit when the transaction was entered into? Was there a commercial animus present at the time?"

In Smith v R., Justice Brulé wrote:

"It is well settled law that a taxpayer's intention at the time he purchases property is paramount in determining whether profit from a subsequent sale constitutes capital gain or business income. For the profit to be considered business income it is not necessary that the sole aim of the taxpayer in purchasing the property be to resell at a profit.... [I]t is sufficient that the possibility of reselling be ... an operating motivation for the acquisition."

In Dastous, the Tax Review Board of Canada held:

"The main criterion established by the courts to determine whether the profit from a transaction is a capital gain or business income is the intent of the taxpayer when he purchased the property which later became the subject of the sale.

"The other criteria (number and frequency of transactions, nature of transaction, advertising and so on), which are never conclusive, only serve to determine the taxpayer's real intent at the time the property which was the subject of the transaction was purchased."

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