Capital property

A Capital Property is that kind of property, which creates capital gains or losses when it is disposed of. Capital property can be tangible and intangible, fixed or circulating assets, or non-depreciable and depreciable. Capital Property does not include properties such as inventory - trade assets of a business

• Tangible capital property are items such as buildings, cars, factory machines, boats, cottages, etc.. They have a physical form and you can touch them.
• Intangible capital property are things such as tenancy rights, patents or trademarks. These things you can not "touch": they don't have a physical form (Canada Revenue Agency, 2018, page 5, 6).

Non-Depreciable and Depreciable Capital Properties

Capital properties are mainly divided into two types: Depreciable and Non-depreciable.

• Non-depreciable property is a property that does not depreciable. If non-depreciable property gains its value, we could say there is a capital gain. On the other hand, if there occurs property loss, then we can name it a capital loss. For example, the non-depreciable capital property may be land or shares held as an investment. Property is not Capital Property if the non-depreciable property is sold, and it does not result in capital loss or capital gain.
• Depreciable property is any property that is used to produce and gain an income. The taxpayer can make a deduction for capital cost allowance. For example, a machine that is used on the production line depreciates over time. The deduction of depreciable capital property is called Capital Cost Allowance [CCA] (Greenan A.J., 2007, page 89, Spenceley R., 1999, page 262).

Capital Gain and Capital Loss

Capital Gain occurs when the capital property is sold for more than its total of adjusted cost base summed with expenses of selling a property. In the situation when property is sold for less than its cost summed together, there occurs then Capital Loss. Situations where capital property is considered as sold, are for example:

• Exchanging one property for another one,
• Property is given as a gift for somebody,
• Property is stolen or destroyed (Canada Revenue Agency, 2018, page 6).

Cost of capital property

Cost of capital property depends on how you bought/acquired it and what type of property it is. It is its actual cost or deemed if it is hard or impossible to identify. Cost of capital property also includes such things as improvements and additions imposed or installed on a specific property (Canada Revenue Agency, 2018, page 5).

Examples of Capital property

• Real Estate: Real estate includes land and any buildings or other structures on it. It also includes any physical improvements to the land, such as roads, landscaping, and fences. It can also include any intangible rights associated with the land, such as mineral rights or water rights.
• Vehicles: Vehicles such as cars, boats, and airplanes are all considered capital property. They can be used to generate income through transportation services or rental opportunities.
• Equipment: Equipment used in a business, such as computers, machinery, and tools, is also considered capital property. This type of property can be used to generate income through the sale of products or services.
• Intellectual Property: Intellectual property, such as copyrights, trademarks, and patents, are all considered capital property. This type of property can be used to generate income through licensing agreements or sales of products or services.
• Stocks and Bonds: Stocks and bonds are also considered capital property. They can be used to generate income through dividends or interest payments.

Advantages of Capital property

The advantages of capital property include:

• Increased financial security: Capital property can provide a steady stream of income, as well as a sense of financial security for its owners. It also provides a hedge against inflation, as its value tends to rise over time.
• Tax benefits: Capital property owners can take advantage of various tax deductions and credits, including investment-related deductions, depreciation, and capital gains.
• Appreciation: Capital property typically appreciates in value over time, which can provide a significant return on investment.
• Leverage: Borrowing money to purchase capital property can increase profits, as the income generated from the property can be used to pay off the loan.
• Liquidity: Capital property can be easily converted into cash, making it a convenient way to access funds when needed.

Limitations of Capital property

The limitations of capital property include:

• Depreciation - Capital property can depreciate over time due to wear and tear, making it less valuable than when it was originally bought.
• Obsolescence - Capital property can become outdated due to technological advancements and changes in consumer preferences, making it difficult to use.
• Maintenance - Capital property requires regular maintenance and repairs, which can be costly and time consuming.
• Liquidity - Capital property is generally not as liquid as other assets such as stocks and bonds, making it difficult to convert into cash quickly.
• Financing - Financing for capital property can be difficult to obtain, as lenders are often unwilling to take on the risk associated with long-term investments.

Other approaches related to Capital property

In addition to capital property, there are several other approaches to economics related to capital property. These approaches include:

• factor payments theory - which suggests that capital property owners have a right to receive returns equal to the marginal product of the capital they provide;
• capital accumulation theory - which states that the amount of capital in an economy is determined by the level of investment and savings;
• marginal productivity theory - which states that the returns on capital are determined by the marginal productivity of the capital;
• capital-output ratio theory - which suggests that the ratio of capital to output is an important determinant of economic growth;
• capital market theory - which suggests that capital markets are an important factor in determining the price of capital; and
• capital asset pricing model - which suggests that the expected return on a given investment is a function of its riskiness.

In summary, capital property is just one of many approaches to economics related to capital property. Other approaches include factor payments theory, capital accumulation theory, marginal productivity theory, capital-output ratio theory, capital market theory and the capital asset pricing model.

Capital property — recommended articles

Physical asset — Commercial facility — Personal assets — Capital turnover — Real asset — Noncurrent asset — Non-operating expense — Gross fixed assets — Paper asset

References

• Bollen L., Vergauwen P., Schnieders S., (2005) Linking intellectual capital and intellectual property to company performance "Accounting and Information Management Department, Faculty of Economics and Business Administration" Netherlands
• Canada Revenue Agency, (2018), Capital Gains, Canada
• Greenan A.J.,(2007), The Executor's Handbook, CCH Canadian Limited, Canada
• Rosentreter K., (2005), Wealthbuilding Insomniac Press, Canada
• Sprankling G.J., (2014), The International Law of Property Oxford University Press, UK
• Spenceley R., (1999), Estate Administration in Ontario, CCH Canadian Limited, Canada

Author: Mateusz Paduch