Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
Yes, it's officially garage sale season. Carolyn loves nothing more than to roam the streets on Saturdays, checking out everyone else's junk. It's a sore point in our home that she wants to buy half of what everyone else is selling.
And so, next weekend we are having a garage sale of our own. Enter problem No. 2. We can't agree on how to price things. I just want to get rid of the stuff. Carolyn has a remarkable memory and can tell you exactly what we paid for every item - at a garage sale last year. And, she's determined to sell it for more. "But Carolyn," I explained, "you'll create a tax problem the likes of which you've never seen before." I was trying any tactic to have her give this stuff away.
THE TAX RULES
What happens if you sell your "stuff" for more than you paid? Does the taxman really care? Most people think nothing of the tax implications. The truth is, if you make a profit selling that old piece of furniture, your stamp collection, or some other property, you could face a tax hit. Here's the lowdown on "personal-use property." Personal-use property (PUP) is simply stuff you own that is primarily for your personal use and enjoyment, or for the use and enjoyment of a person related to you.
Think about it. Most of the things you have at home are considered PUP. Everything from your furniture, appliances and pool table, to your car and that trampoline the kids use in the backyard. PUP can also include property owned by a trust or partnership where the property is for the personal use and enjoyment of any beneficiary or partner, respectively (or someone related to these).
So, what's the big deal? Any disposition of PUP could give rise to a tax hit if you're not careful. You see, subsection 46(1) of Canadian tax law dictates what happens when you dispose of any PUP. The rules say that your adjusted cost base (ACB) will be set at $1,000 or the actual ACB, whichever is greater. Likewise, your proceeds of disposition will be set at $1,000 or the actual sale proceeds, whichever is greater. The bottom line? Any PUP with a value of $1,000 or less will not trigger a taxable capital gain.
Consider the sale of my old treadmill - which I plan to sell next weekend. The treadmill originally cost $900, so that's my ACB. If I sell it for $950, what would the tax consequences be? My proceeds would be the greater of $1,000 and my actual proceeds of $950. Answer? Proceeds of $1,000. My ACB would be set at the greater of $1,000 or my actual ACB of $900. Answer? My ACB is set at $1,000. Okay, now do the math. With deemed proceeds of $1,000 and a deemed ACB of $1,000, my gain is nil. No tax.
But what if I happen to sell that treadmill for $1,500 to my gullible neighbour? My proceeds then will be the greater of $1,000 and the $1,500 actual proceeds. Answer? Proceeds of $1,500. My ACB is still the greater of $1,000 and my actual ACB of $900. Answer? ACB of $1,000. So, with proceeds set at $1,500 and an ACB of $1,000, I've got a $500 capital gain to report on my tax return this year.
FINAL THOUGHTS
I should also mention that, while the taxman is happy to tax certain gains on the disposition of your PUP, don't count on claiming any losses if you sell for less than your cost. Paragraph 40(2)(g) of our tax law will deny the losses.
Finally, certain assets that are PUP will be given more lenient tax treatment. This subset of property is called "listed personal property" (LPP). LPP consists of any print, etching, drawing, painting, sculpture, or other similar work of art, jewellery, rare folio, rare manuscript, rare book, stamp or coin. In the case of LPP, losses can be applied to reduce gains on the sale of other LPP.
Tim Cestnick