Balance wins and losses to come out ahead.
By Samantha Prasad, LL.B.
Selling a winning stock at current market highs will result in a capital gain. Exactly what you want! Unfortunately, it could also result in a hefty tax bill – exactly what you don’t want. Luckily, you may be able to offset those taxes by looking for hidden losses. Here are few tips.
Check your carryforward balances. You may have incurred capital losses in a previous year that you never used. This is quite possible, because deductions for capital losses can be claimed only against capital gains, and unclaimed capital losses can be carried forward indefinitely. If you don’t have back records, another idea is to contact the Canada Revenue Agency (CRA) to request your personal carryforward balances.
Have your kids report capital gains. If an investment is owned by your children, the gain can be reported on their tax return. This could dramatically slash (or even
eliminate) the tax bite.
Here’s why: Every Canadian individual, irrespective of age, is legally entitled to the basic personal exemption, which covers off the first $11,138 of income (for 2014).
And with the 50% capital gains inclusion rate, this means that kids with no other income can now earn just over $22,000 of capital gains annually, without paying a cent of tax.
And what if the gain exceeds this amount? Since your child pays tax on the gain in the lowest tax bracket, the tax rate is still only about half of what a high-income earner would pay. (Note: The parent who funds the child’s investment must normally pay tax on interest and dividends generated by the investment until the year the child turns 18.)
Sometimes, people hold an investment for their kids (e.g., as a gift), but registered in the name of the adult. This isn’t necessarily a show-stopper.
For one thing, if the account is registered in your name “in trust,” this may show that it is really for your kids. Another option is to visit a tax advisor to discuss the possibility of documenting the fact that the investment is for your kids, for example, by filling out a legal declaration of trust.
Defer with reserves. If you sold an investment for a capital gain, but you are not entitled to receive the cash proceeds until the end of the year, you are allowed to defer a portion of your capital gain until next year by claiming a “reserve.” Basically, reserves may enable you to defer your tax on capital gains over a five-year period.
Tax-loss selling. If you are looking to sell a winning stock, there’s a chance that for every winner, you’ll probably have a loser. To offset your gains, simply sell off some of some of your losing positions, that is, if the stock no longer meets your investment criteria.
“Last chance” capital gains election. There are still some of these kicking around, especially in older, long-standing investment accounts. For those of you “of a certain age,” check your 1994 return to see if you have made the “last chance” election to take advantage of the now-defunct $100,000 capital gains exemption. For most investments, this will result in an increase to the cost base of the particular item, which in turn will reduce your capital gain.
This assumes, however, that you have held the particular investment since before 1994. (If your gain is on a mutual fund and you made the election on it, you may have a special tax account – known as an “exempt capital gains balance” – which can be used to shelter capital gains from the fund.)
Courtesy Fundata Canada Inc. ©2014. Samantha Prasad, LL.B., is Tax Partner with Toronto law firm Minden Gross LLP. Portions of this article appeared in The TaxLetter, published by MPL Communications Ltd. Used with permission.
Selling a winning stock at current market highs will result in a capital gain. Exactly what you want! Unfortunately, it could also result in a hefty tax bill – exactly what you don’t want. Luckily, you may be able to offset those taxes by looking for hidden losses. Here are few tips.
Check your carryforward balances. You may have incurred capital losses in a previous year that you never used. This is quite possible, because deductions for capital losses can be claimed only against capital gains, and unclaimed capital losses can be carried forward indefinitely. If you don’t have back records, another idea is to contact the Canada Revenue Agency (CRA) to request your personal carryforward balances.
Have your kids report capital gains. If an investment is owned by your children, the gain can be reported on their tax return. This could dramatically slash (or even
eliminate) the tax bite.
Here’s why: Every Canadian individual, irrespective of age, is legally entitled to the basic personal exemption, which covers off the first $11,138 of income (for 2014).
And with the 50% capital gains inclusion rate, this means that kids with no other income can now earn just over $22,000 of capital gains annually, without paying a cent of tax.
And what if the gain exceeds this amount? Since your child pays tax on the gain in the lowest tax bracket, the tax rate is still only about half of what a high-income earner would pay. (Note: The parent who funds the child’s investment must normally pay tax on interest and dividends generated by the investment until the year the child turns 18.)
Sometimes, people hold an investment for their kids (e.g., as a gift), but registered in the name of the adult. This isn’t necessarily a show-stopper.
For one thing, if the account is registered in your name “in trust,” this may show that it is really for your kids. Another option is to visit a tax advisor to discuss the possibility of documenting the fact that the investment is for your kids, for example, by filling out a legal declaration of trust.
Defer with reserves. If you sold an investment for a capital gain, but you are not entitled to receive the cash proceeds until the end of the year, you are allowed to defer a portion of your capital gain until next year by claiming a “reserve.” Basically, reserves may enable you to defer your tax on capital gains over a five-year period.
Tax-loss selling. If you are looking to sell a winning stock, there’s a chance that for every winner, you’ll probably have a loser. To offset your gains, simply sell off some of some of your losing positions, that is, if the stock no longer meets your investment criteria.
“Last chance” capital gains election. There are still some of these kicking around, especially in older, long-standing investment accounts. For those of you “of a certain age,” check your 1994 return to see if you have made the “last chance” election to take advantage of the now-defunct $100,000 capital gains exemption. For most investments, this will result in an increase to the cost base of the particular item, which in turn will reduce your capital gain.
This assumes, however, that you have held the particular investment since before 1994. (If your gain is on a mutual fund and you made the election on it, you may have a special tax account – known as an “exempt capital gains balance” – which can be used to shelter capital gains from the fund.)
Courtesy Fundata Canada Inc. ©2014. Samantha Prasad, LL.B., is Tax Partner with Toronto law firm Minden Gross LLP. Portions of this article appeared in The TaxLetter, published by MPL Communications Ltd. Used with permission.
