Corporate taxation and capital gains realization in Canada

Tao Zeng

Accounting School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada, N2L 3C5. E-mail: tzeng@wlu.ca. Tel: (519)884-0710 ext. 2562. Fax: (519)884-0201.

Accepted 30 October, 2009

   Abstract

In this paper, an empirical work is designed to test whether corporate capital gains realization is associated with corporate tax. Under Canadian tax rules, capital gains are taxed when a taxpayer realizes them, rather than at the time that those gains accrue. It was tested whether corporate tax status, including accumulated loss-carry-overs, affects the decision to realize capital gains. Using financial statements from Canadian corporations, this study finds that, after controlling for other factors, corporate capital gains realization is positively associated with loss-carry-overs accumulated from previous years, which generally supports the argument that corporations take into account their tax status when realizing capital gains. This study also finds that firms realize capital gains for financing purposes. However, this study does not find that firms realize capital gains to manage earnings.

Key words: Capital gains realization, tax rate, loss-carry-over.