What is Asset Disposition?
Asset disposition is the process of properly disposing or recycling equipment that is no longer needed or outdated.
What is a Capital Asset?
Capital assets typically include securities such as stocks and bonds for properties like cottages. They also include depreciable property, which is often considered as property used to generate revenue for a business or property whose capital cost can be claimed as capital cost allowance over a period of time. Capital assets may generate financial gain or loss upon their sale, but they do not include a company’s trading assets like inventory. They are purchased solely for investment or income-generating purposes. It is worth noting that according to the CRA’s list of depreciable property types, land is not considered a depreciable capital asset.
Reporting the Disposition of Capital Property
Whenever you sell a capital asset, you are required to report the proceeds of disposal, even if you did not realize a capital gain or loss. To determine what needs to be reported, complete Schedule 3. This form consists of eight different sections, each dedicated to a specific class of capital asset, and will calculate the capital gains to be reported on line 12700 of your income tax return prior to reporting the disposition of capital property.
Converting Foreign Transaction Proceeds
If you have sold a capital asset for foreign currency, you must convert the proceeds of disposal into Canadian dollars. Do not use the exchange rate on the day you prepare your income tax return, but use the rate that was in effect on the day the capital asset was sold.
Transferring Capital Assets
When you give away capital assets to friends, family members, or anyone else, you do not determine your capital gains or losses using the proceeds of disposition. In such cases, the proceeds of disposition would be zero, and you would suffer a loss. However, the CRA requires you to use them to prevent you from claiming a loss that you have not actually incurred.
To ensure that you are complying with tax rules as strictly as possible, you may want to have the property appraised. Keep the appraiser’s name and phone number in your records, along with the appraisal documents, in case of an audit.
Maintaining Records for Better Documentation
While the CRA does not require you to submit documents with your income tax return, it does require you to keep them in case of an audit.
Be sure to keep track of the price you paid for the property, any capital improvements you made, receipts for any costs associated with selling the property (such as advertising or real estate agency fees), and a record of the sale.
Asset disposition can be a complex concept that is difficult for many people to comprehend, especially when it comes to depreciating assets. This blog provides an overview of how to dispose of assets in Canada, but if you encounter any difficulties, it is recommended that you seek assistance from the internet or an expert.