Originally published in The Fund Library, on September
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. Last time, I showed you how
to use bad loans, bad businesses, and bad bonds as possible tax
losses. Here are few more.
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
Next time: More tax strategies for cutting, sheltering,
and offsetting capital gains tax.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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