CRA Capital Gains Audit — Montreal CPA Firm Near You: Defending Your Capital Gains Tax Reporting and Compliance

A CRA Capital Gains Audit is conducted when CRA questions the classification of a sale or transaction as capital gains or business income. Capital gains tax is applied to the sale of investments or assets, and the way a transaction is reported can significantly impact the tax amount owed. If CRA suspects misclassification, they will scrutinize whether gains should be treated as capital income or business income.

Mackisen CPA Montreal helps businesses and individuals defend their capital gains tax filings by providing detailed documentation, verifying market valuations, and ensuring that all sales of assets are correctly classified according to Income Tax Act guidelines.

Legal Foundation

Income Tax Act s.39 — defines the rules for capital gains and capital losses.
Income Tax Act s.9 — governs the taxation of business income and distinguishes it from capital income.
Income Tax Act s.13(1) — outlines the rules for the sale of capital property and the calculation of gains and losses.
Jurisprudence: MacDonald v. Canada (2020 SCC) — establishes the test for distinguishing business income from capital gains based on frequency and intent.

Learning insight: The key to a capital gains audit is ensuring that the sale is properly documented as a capital transaction, not business income.

Why CRA Initiates Capital Gains Audits

CRA’s Capital Gains Audits typically arise when they notice:
• frequent asset sales that resemble business activity, rather than investment income
• large, sudden gains that appear inconsistent with the taxpayer’s declared income
• misreporting of income from asset sales as capital gains instead of business income
• reinvestment of capital gains into further business activity, suggesting business income rather than an investment
• inconsistent reporting between capital gains and sale of property on T1 or T2 returns
• discrepancies in capital loss carrybacks or carryforwards
• foreign property sales where Canadian tax implications weren’t considered

Learning insight: CRA audits capital gains to ensure that asset sales are classified accurately — and that investments are taxed correctly.

CRA Capital Gains Audit Process

1. CRA issues an audit notice, requesting sales documentation, contracts, and financial records related to the transaction.

2. CRA reviews the sale of property, including land, equipment, or investment assets, to determine if they were held as capital property.

3. CRA compares the sales price with market valuations to ensure the correct calculation of capital gains.

4. CRA checks whether capital gains tax exemptions (e.g., Principal Residence Exemption) were applied correctly.

5. CRA may examine previous transactions and analyze whether a sale is considered a one-off capital event or part of a series of business-like transactions.

6. CRA issues a proposed adjustment if discrepancies are found, potentially reclassifying capital gains as business income.

Learning insight: The audit process focuses on whether your asset sale activity aligns with the capital gains treatment — or if it should be reclassified as business income.

Mackisen CPA’s Capital Gains Defense Strategy

• ensure proper classification of property sales as capital assets (e.g., residential, land, investments)
• provide market valuations or independent appraisals for the sale of real estate or specialized assets
• reconcile the sale price with prior purchase prices to demonstrate gains or losses
• verify the principal residence exemption for eligible properties and ensure its application is valid
• defend business income claims by providing evidence that sales were part of a commercial operation
• demonstrate the holding period of assets to prove they were treated as long-term investments
• prepare transfer-pricing documentation for intercompany asset sales to demonstrate the arm’s-length nature of the transactions
• file a formal objection if the reassessment results in misclassification or excess penalties

Learning insight: Clear documentation that supports the sale intent, holding period, and investment classification prevents CRA from misclassifying capital gains.

Common CRA Findings in Capital Gains Audits

• frequent property sales that resemble business activity rather than investment
• incorrectly applied principal residence exemptions or improperly reported capital gains
• capital gains treatment applied to properties or assets held for short-term business use
• misclassifications of capital versus business income for rental properties, real estate flipping, or investment assets
• lack of supporting documentation for property valuations, market analysis, or comparative sales
• failure to account for capital losses in the same year or to carry losses forward appropriately

Learning insight: Misclassification is the most common issue. Supporting evidence is what differentiates business income from capital gains.

Real-World Results

• A real estate investor avoided a $250,000 tax reassessment when Mackisen CPA demonstrated that property sales were long-term capital investments and not business sales.
• A tech startup saved $400,000 in capital gains tax adjustments after we proved that a sale of shares was part of an investment strategy rather than business activity.
• An estate avoided a $200,000 tax liability when we demonstrated the correct capital gains exemption applied to the family cottage under the principal residence exemption.

Learning insight: Documentation clarity makes the difference between capital gains and business income. We provide clarity.

SEO Optimization and Educational Value

Primary keywords: CRA capital gains audit, Mackisen CPA Montreal, capital gains tax defense, CRA asset sale audit, capital gains exemption defense
Secondary keywords: principal residence exemption, capital gains business income audit, CRA asset classification, tax reclassification defense, capital gains audit Montreal

Learning insight: Clear documentation and precise classifications maximize both your audit defense and your online visibility in SEO.

Why Mackisen CPA Montreal

With over 35 years of experience defending capital gains audits, asset sales, and business income classifications, Mackisen CPA Montreal has helped numerous businesses and individuals protect their capital gains tax position. Our bilingual team ensures your sale transactions are documented, classified, and defended with the highest standard of evidence.

Learning insight: Whether it’s personal or corporate, capital gains audits demand documentation precision. We ensure your transactions are safe.

Call to Action

If CRA has reassessed your capital gains or flagged your asset sale as business income, you need to act swiftly.
Contact Mackisen CPA Montreal for capital gains audit defense, reclassification support, and complete documentation preparation.
Phone: 514-276-0808 | Email: info@mackisen.com | Website: mackisen.com

Learning conclusion: A CRA capital gains audit requires detailed documentation and precise income classification. Mackisen CPA Montreal ensures your asset sales are treated as long-term investments, preventing costly reassessments and penalties.