To be a capital gain or loss, the gain or loss must result from the disposition or deemed disposition of a property. A disposition of property occurs when there is a transaction which entitles the seller to receive proceeds.
To claim capital gain or losses, the property must be capital in nature. Over the years, the courts have developed some guidelines to be considered when deciding whether the transaction is of a capital or income nature.
- The period of ownership: property held for a short period will be considered to have been purchased for the purpose of resale and profits will be treated as income, while property that has been held a long time is more likely to be considered an investment and thus give rise to capital gain.
- The frequency of similar transactions: a history of extensive buying and selling of similar properties may be taken as evidence indicating that the taxpayer is carrying on a business.
- Improvement and development work: when an organized effort is made to put property into a more marketable condition, it may indicate a business of selling properties.
- Reasons for and nature of sale: if a sale of property is the result of an active campaign to sell it rather than the result of something unanticipated at the time of purchase, the profits will be considered as business income (i.e. frustration of original intention).
- The relationship of the transaction to the taxpayer’s ordinary business.