Now, I do not pretend to know how the market works. But on the assumption
that the runup after the election is starting to run out of steam, I
wondered if people were tempted to start to keep their money in cash and
cash-equivalent instruments. No doubt the low risk associated with such
investments is hard to ignore. However, it should be worth noting that
seeking safety in income-producing investments and cash may sometimes buy
you a tax problem, since it may likely require you to change your
A little shelter from capital gains tax
If you are holding stock that has an accrued gain but are convinced that
it’s still safer to trigger a capital gain on the sale of that stock and
hold the resulting funds in cash, then here are some possible tax losses
that may be able to use to shelter from or offset the resulting capital
Included here could be such items as bad mortgage investments or junk bonds
(or even a no-good advance to your company, bad loans to a business
associate, and so on.).
To obtain a deduction, the loan must generally be interest-bearing. So, if
you made a loan to a relative on an interest-free basis, for example, the
Canada Revenue Agency (CRA) can take the position that the loan was not
taken out for income-earning purposes and therefore no loss is available to
begin with. An exception to this arises if you are a shareholder of a
Canadian corporation and have advanced the money to it on a low- or
no-interest basis. In this case, provided that certain conditions are met,
the CRA will give you at least a capital loss on the bad loan.
When is a loan bad? The government’s position is that claiming a bad-debt
loss on a loan is basically an all-or-nothing proposition: The whole of the
loan must be uncollectible; or when a portion of the debt has been
“settled,” the remainder must be uncollectible. Also, the party line is
that either you must have exhausted all legal means of collecting the debt,
or the debtor must have become insolvent, with no means of paying the debt.
Another overlooked source of tax losses is investments in companies that
have gone bankrupt or are now worthless because of insolvency and the
cessation of business activities. This may often include a company that has
been delisted from a stock exchange.
Note: If a bad investment is in a Canadian private company that was engaged
in active business, the loss could qualify as an “Allowable Business
Investment Loss” (ABIL). If so, this type of loss can be deducted against
any type of income, whereas a normal capital loss can be deducted only
against capital gains. Word of warning: If you claim an ABIL, assume that
you will receive a standard letter from the CRA asking for information to
support your claim.
Bonds purchased at a premium.
If you have invested in a bond (i.e., outside your RRSP), it is possible
that you purchased it at a premium over its redemption price because the
coupon rate on the bond itself was higher than comparable interest rates
when you bought the bond. In these cases, there will probably be a capital
loss at maturity, or if you have sold it.
* “Last chance” capital gains election.
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 in the cost base of the
particular item, which in turn will reduce your capital gain; however, that
also assumes 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.
* Check your carryforward balances.
Check to see whether you incurred capital losses in a previous year that
you have not yet 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
records, another idea is to contact the CRA to request your personal
* Have your kids report capital gains.
If an investment is owned by your kids, the gain can be reported on their
tax return. This could dramatically slash – 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
$11,474 of income (for 2017). 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.
Even if the gain exceeds this amount, since your kid pays tax on the gain
in the lowest tax bracket, the tax rate is significantly lower than that of
a high-income earner. (Note: if the parent funded the child’s investment,
the parent must normally pay the tax on interest and dividends generated by
the investment until the year the child turns 18, unless a prescribed loan
strategy was put in place – more on this in my next article.)
Sometimes, people hold an investment for their kids, e.g., as a gift for
them, but register it 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. A tax advisor may
also suggest the possibility of documenting the fact that the investment is
for your kids, e.g., by filling out a legal declaration of trust. Of
course, this is assuming that there originally was a gift to the child.
* 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.
* Sell off losers.
If you are looking to getting out of stocks, there’s a chance that for
every stock that has an accrued gain, you probably have another stock that
is sitting in a loss position. So simply engage in tax-loss selling – sell
off some of your losers to trigger some losses to offset your gains.
The family that splits saves on tax.
Samantha Prasad, LL.B., is a Partner with Toronto law firm
Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-editor of various
Wolters Kluwer Ltd. tax publications. Portions of this article first appeared in The TaxLetter, © 2017 by
MPL Communications Ltd. Us
ed with permission.
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The foregoing is for general information purposes only and is the opinion
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