Capital property is any asset held for investment or long-term use whose disposal produces a capital gain or loss rather than business income, the distinction that determines how the CRA taxes the proceeds.

Shares, real estate, and business assets held for long-term use are capital property. Inventory and assets held primarily for resale are not. The classification matters because capital gains receive preferential tax treatment: only 50 percent of a capital gain is included in taxable income, while income from the sale of inventory or property held for resale is fully taxable as business income.

The CRA does not always accept a taxpayer’s characterization of a transaction as capital rather than income. Frequent trading, short holding periods, and evidence of an intention to resell at a profit can result in a reassessment that treats proceeds as fully taxable income. Documentation of the original investment intent is the first line of defense.

How a disposition is classified determines how much tax is paid on the proceeds. See how Wefinx approaches tax planning.

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