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Tag: Capital Gains Tax

  • Can you move income back and forth between spouses? – MoneySense

    Let’s look at reporting investment income and capital gains, and which spouse should report the capital gain on a rental property. 

    Reporting investment income

    When you earn investment income like interest or dividends in a taxable investment account, or rental income from a rental property, you need to report it on your tax return.

    Taxpayers sometimes mistakenly think they can minimize the tax payable by choosing which spouse’s tax return to report the income on, and in some cases, changing the allocation from year to year. Unfortunately, it does not work that way. The income must be reported by the spouse who earned it. If the asset is truly joint, each taxpayer would report their proportionate share of the income on their tax return.

    Reporting capital gains

    Like other sources of income, capital gains have to be reported by the person who earned the income. If the capital gain is on a property held in your name only, Zlatko, you cannot report half the capital gain on your spouse’s tax return to reduce tax, nor can you use their registered retirement savings plan (RRSP) room to reduce the taxable income.  

    Presumably, you have been reporting 100% of the rental income on your tax return annually, so to change that reporting suddenly when there is a big income inclusion from the capital gain is not an option. If you were reporting the income incorrectly all along, and it should always have been reported jointly, you should go back and adjust your tax return and your spouse’s tax return. Interest would apply on your spouse’s balance owing, and you would receive a refund. But you should have a good reason for the oversight, as the Canada Revenue Agency (CRA) does not like this sort of “convenient” retroactive tax planning.

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    Legal versus beneficial ownership

    You mentioned that the property is in your name. For tax purposes, there is always a distinction between legal ownership and beneficial ownership. 

    An asset can be legally owned by one spouse but beneficially belong in part or in whole by the other. If you both contributed equally to the down payment for the property, for example, you should report the capital gain equally, despite the property being held in your name alone, Zlatko.

    However, if this was inconsistent with the past reporting of the rental income, that means you may have been reporting the property incorrectly all along. It does not sound like this is the case for you.

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    Spousal attribution

    On the other hand, if your spouse gave you the money for the down payment, so that the property technically belongs to them beneficially, the income may be subject to attribution. If both spouses have contributed differing amounts at different times, it can be more complicated to determine beneficial ownership for tax purposes. It bears mentioning that spouses can own an asset in a proportion other than 50/50 as a result.

    Spousal attribution is when income is earned by one spouse, but because of the source of the funds that generated the income, that income gets taxed back to the contributing spouse.

    If your spouse actually bought this rental property in your name to try to reduce tax, it may be that the capital gain and all the past rental income should technically be taxed to them, Zlatko. 

    Transferring assets between spouses

    Sometimes, people ask me about transferring an asset to their spouse, or adding their spouse’s name to the property prior to selling it. A transaction like this runs into the same spousal attribution issue, where an asset you own, transferred to your spouse, will have resulting income taxed back to you.

    As a result, you cannot transfer partial ownership to your spouse in an attempt at last-minute tax planning.

    Tax reduction options

    You brought up contributing to your and your spouse’s RRSPs, Zlatko. This is definitely one way to reduce your taxable income in the year you sell the property. If the capital gain is large, or your income is relatively high besides the capital gain, you may be able to offset about $2 of capital gains with every dollar contributed to your RRSP.

    This is because only half of a capital gain is taxable. So, you would only need a $50,000 RRSP contribution to fully offset a $100,000 capital gain.

    If you can control your income in the year of the capital gain by reducing or avoiding other sources of income, you may be able to mitigate some of the tax payable on the capital gain, as well. For example, if you are a business owner who can lower your salary or dividends, or you can defer other capital gains or registered account withdrawals, or you can claim or accelerate other tax deductions.

    Jason Heath, CFP

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  • How high tax rates hurt the economy – MoneySense

    How high tax rates hurt the economy – MoneySense

    At a time when Canada, just like every other country, is looking for highly skilled workers, our tax rates make it more difficult for them to choose to work here. This is equally true for Canadian citizens and potential new immigrants. Anecdotally, I’m hearing more and more from clients and people in my network that their children who have chosen to study abroad aren’t coming back home because they can earn and keep more of their income elsewhere. I’m not surprised.

    Our high tax rates also make it hard to attract investment into our country and for existing businesses to expand. That is essential to improve productivity, innovate, create jobs and compete against peers in lower-tax jurisdictions.

    The Allan Small Financial Show, featuring three tax experts—Fred O’Riordan of Ernst & Young, Jake Fuss of The Fraser Institute and Tim Cestnick, a Globe and Mail tax columnist and CEO of Our Family Office—originally aired on September 18, 2024.

    Let’s explore a flat tax

    We need a better, more thoughtful tax strategy as a country—one that is fair for everyone. Canada has not taken a hard, comprehensive look at our tax system since 1962, when Prime Minister John Diefenbaker appointed the Royal Commission on Taxation.

    At the very least, it would be an opportunity to streamline what is a very complicated system, as I see it. At best, it may point to a better way forward. One potential way to streamline our tax system, and make it more efficient and fair, is to implement a flat tax rate across the board. This is not a new concept for taxation.

    For the past decade, Estonia has reaped the rewards of having the most competitive, simple and transparent tax system in the OECD. Its personal and corporate tax rates are 20%. It’s set to increase to 22% in 2025 to match its consumption tax, which increased from 20% to 22% in 2024. In the case of individuals, the tax rate does not apply to dividend income; and businesses only pay tax on distributed profits.

    The result: the country has been very successful attracting startups and investment.

    And we don’t have to leave Canada for an example of a flat tax. From 2001 to 2014, Alberta had a single 10% personal and business income tax rate, dubbed the Alberta Tax Advantage. The Fraser Institute is now calling for Alberta to implement an even lower flat tax of 8% on personal and business income to attract people, businesses and investment in the province and to encourage spending. When Canadians pay less tax, they have more to spend and put back into the Canadian economy.

    Another potential way to ensure tax fairness and generate revenue to meet government responsibilities is to foster more opportunities for the public, business and government to collaborate. For example, why not give individuals and businesses the ability to invest in infrastructure projects, such as new roads and highways, and get a rate of return over time.

    Allan Small, FMA, FCSI

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  • Tax implications of adding a child’s name to your rental property – MoneySense

    Tax implications of adding a child’s name to your rental property – MoneySense

    Gifting some or all of a rental property

    The act of adding a name to a property itself does not give rise to capital gains tax. There’s a distinction between legal ownership (whose name is on title) and beneficial ownership (who technically owns the property). If only legal ownership changes, and not beneficial ownership, there may not be a tax event.

    For example, an elderly parent might add their child’s name to their bank account or to the title to their home. They might do this based on the perception that it will simplify dealing with the assets as they age, or in an attempt to avoid probate tax. In these situations, a power of attorney or similar estate document (depending on the province or territory) may be better. The asset may not fall outside of the estate and avoid probate if beneficial ownership remains with the parent. There can also be risks to adding a child’s name to title, including creditor issues if the child is sued, family law disputes if the parents divorce, and elder abuse given the children can access the asset.

    Was there a deemed disposition?

    In your case, Flo, it sounds like your husband intended to partially dispose of the property. Did he document this specifically with a lawyer, or did he just add your daughter’s name to the rental property? Is she now receiving half the rental income?

    A true intention to transfer results in a deemed disposition of one-half of the property at the fair market value. It’s equal to selling part of the property, with tax payable when your husband files his tax return next year.

    Dealing with the increased capital gains inclusion rate

    It seems your husband added your daughter to the property title because of the increase in the capital gains inclusion rate on June 25, 2024.

    Beginning on that date, the inclusion rate for individuals rose from one-half to two-thirds for a capital gain of $250,000 or more in a single year. This means two-thirds of the capital gain is taxable instead of just one-half (as was the case prior to June 25). It’s only the capital gain in excess of $250,000 that is taxable at the higher rate. (For corporations and trusts, the inclusion rate is two-thirds for all capital gains.)

    You mention, Flo, that this was done for estate planning purposes. I assume you intend to hold the property for the rest of your lives. If that could be many years, it may not be advantageous to accelerate the payment of capital gains tax. Some of the capital gain will still likely be subject to the higher inclusion rate—no matter what—and paying tax earlier than you need to could be disadvantageous.

    I’m raising this not as a criticism, but because you may still be able to reconsider, if you haven’t specifically documented your intention and you simply added your daughter’s name to the property title. You should do some tax calculations with your accountant and discuss the documentation of the transfer with your lawyer.

    Jason Heath, CFP

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  • Yes, a cottage is an investment property—here’s how to minimize capital gains tax – MoneySense

    Yes, a cottage is an investment property—here’s how to minimize capital gains tax – MoneySense

    Should you keep renting a cottage or buy one?

    You don’t need me to explain the personal perks of having a vacation home or a cottage. But to many people, a cottage is also an investment. There are costs and hopefully returns, especially if you decide to rent it out. If you hope to buy, find out what you need to pay beyond the listing price and how you might finance the purchase.

    Read: Is a vacation home a good investment?

    Is there a capital gains tax exemption for a cottage?

    Sorry to be the bearer of bad news, but there isn’t. There was once a lifetime capital gains exemption of $100,000, but that no longer exists. It only applied in Canada from 1984 to 1994. There are other ways to minimize taxes on the sale of a cottage, though. What about selling to a family member: Can you avoid taxes that way? It depends on a few factors, such as the relationship, if the second property can be claimed as a principal residence, and more.

    Read: Can I sell my cottage tax-free?

    Read: Selling a cottage to a family member: What that means for capital gains

    Do you pay tax when inheriting a cottage?

    The short answer: It depends on your relationship to the person who owns it. Are you an extended family member? Their adult child? Or are you their spouse? Find out how inheriting a cottage can affect taxes for a spouse with children and the steps to take to minimize what’s owed. 

    Read: Inheriting cottage and the capital gains implications

    How to reduce taxes on the sale of a cottage

    This next article goes through the multiple factors that can influence how you plan for capital gains on family-owned cottages, including: 

    Lisa Hannam

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  • Adding names to a cottage deed could result in big tax bills

    Adding names to a cottage deed could result in big tax bills

    You mention that the cottage deed is in your name only right now. That suggests that it was either in your name all along or that the cottage was owned jointly with your husband with right of survivorship. I suspect it was held jointly with right of survivorship, meaning that it was transferred directly to you on your husband’s death. That means that it passed outside of his will regardless of his wishes contained therein.

    Ask a Planner: Leave your question for Jason Heath »

    Are there capital gains on inheriting a cottage?

    Sometimes the ownership structure of an asset trumps a will, and this may be a case of that, Jill. When an asset passes to a surviving spouse on death, by default, it is transferred at its adjusted cost base for tax purposes, meaning no capital gains tax is payable at that time. The executor can elect to have some or all of the capital gain taxed on the final tax return of the deceased, if it’s advantageous to do so, but let’s assume this didn’t happen. This means that all the accumulated capital gains have been passed along to you and this is important as it relates to the next steps you take with the cottage.

    Do you have to share an inherited cottage?

    You may not have a legal obligation to include your three stepchildren in the ownership of the cottage, Jill, since the cottage passed outside the will due to joint ownership. If you are in doubt, you should seek legal advice. It sounds like there is at the very least a moral obligation to include your stepchildren in the ownership, but it will result in a gift to your husband’s children—and therefore has tax implications.

    Beneficiary of taxes

    Because the accumulated capital gains have all been passed along to you, if you gift three-quarters of the cottage to them, you will personally have a capital gains tax liability in the year of transfer. Some people think they can skirt the capital gains tax by making the gift for $1 or for a value equal to the cost, but that’s not the case in Canada. The transfer in ownership needs to happen at the fair market value, meaning the appraisal you suggested may be relevant, Jill. An appraisal is not mandatory when determining the fair market value for a transfer but may be advisable.

    Assuming you have sufficient resources to pay the capital gains tax, you may not be worried. But the capital gains tax bill could be a big one if you’ve owned the cottage for a long time.

    Keep in mind there are options. You could treat the cottage as your principal residence, with the transfer to your stepchildren, therefore being tax-free. But this would expose your house in the city to capital gains tax on the sale of it or upon your own death.

    You need to weigh the pros and cons of paying tax today versus deferring it to determine, if this is advantageous to use the principal residence exemption for the cottage. You may also be limited in doing so if you had a previous principal residence that you sold during the time you have owned the cottage and you treated it as your principal residence, with no capital gains tax payable. This would negate the years you owned the cottage and claimed another principal residence exemption.

    Jason Heath, CFP

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  • Capital gains tax when renting out your former principal residence – MoneySense

    Capital gains tax when renting out your former principal residence – MoneySense

    According to the Canada Revenue Agency (CRA): “To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.”

    So, there isn’t a specific form to file to claim this election.

    A taxpayer in Canada may be able to extend the four-year limit indefinitely, but this requires your employer or your spouse’s employer to ask you to relocate. It sounds like you relocated in order to look for work, Hugh, so this extension will not apply.

    Filing an election late

    The 45(2) election is supposed to be filed in the year you move out of the home. The deadline is the tax filing deadline for your tax return that year. This would be April 30 for most taxpayers, and June 15 for those who are self-employed or whose spouse is self-employed.

    The CRA can accept a late-filed subsection 45(2) election, if your situation matches one from a list of extraordinary circumstances.

    There is jurisprudence to support late-filed election. In Irene Gjernes v. Canada Revenue Agency, the CRA was ordered to reconsider a disallowed 45(2) election that was filed late by the taxpayer despite no extraordinary circumstances.

    For the late-filed election, the CRA can levy a penalty of the lower of $8,000 or $100 per month past the due date. If the tax savings are more than the penalty, a late-filed election may be worth the penalty risk.

    Capital gains tax when changing the use of a property

    Since a home that is converted into a rental property is subject to a deemed disposition at the time of conversion, the fair market value at the time the rental began is the adjusted cost base (ACB) for capital gains tax purposes. A subsection 45(2) election could defer this conversion date.

    Jason Heath, CFP

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  • Tax deductible expenses when selling a cottage

    Tax deductible expenses when selling a cottage

    There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Capital expenses are an example. The Canada Revenue Agency (CRA) defines a capital expense as an expense that:

    • Gives a lasting benefit or advantage;
    • improves the existing property;
    • is a separate asset; or
    • is considerable in relation to the value of the property.

    Capital gain vs capital expense for the costs of owning and selling a cottage

    There’s a distinction between a capital expense—which increases your cost base and reduces your capital gains tax on a property—and a current expense, which is a repair. Repairs are only tax deductible when a property is used for rental or business purposes against the income earned but have no impact on capital gains.

    In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof, and is considerable in value.

    The windows and flooring also provide a lasting benefit. The stove is a separate asset, in its own right. So, these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

    What is a capital gain?

    A capital gain is the increase in value on any asset or security since the time it was purchased, and it is “realized” when the asset or security is sold. (Similarly, a capital loss is realized when you sell an asset that has decreased in value since the time of purchase.) Capital gains (or losses) can happen on stocks, mutual funds and real estate. 

    Read more about capital gains in the MoneySense Glossary: “What are capital gains?”

    Is replacing a cottage deck a capital expense?

    The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the CRA gives a specific example on their website of an expense for wooden steps being a current expense. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So, whether the deck and stair expenses are capital or current would be a matter of fact depending on the exact nature of the work.

    Note that the CRA does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

    Cottages for sale: What happens if you have a capital gain?

    The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition, and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale, or two thirds if the capital gain in excess of $250,000 in a given year for a taxpayer. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence, income sources, and the magnitude of your capital gains for the year.

    Read more about owning a cottage:




    About Jason Heath, CFP

    Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

    Jason Heath, CFP

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  • When are costs for a U.S. property tax-deductible in Canada? – MoneySense

    When are costs for a U.S. property tax-deductible in Canada? – MoneySense

    It sounds like you sold or are planning to sell a property in the U.S., Bob. To cut to the chase, selling costs, like a realtor commission, would be deductible on your Canadian tax return.

    This assumes the property is taxable, which is typically the case for a foreign property. Interestingly, a property outside Canada can qualify as your principal residence. But this would be unusual for a Canadian resident, whose Canadian home would typically be more valuable than a foreign one, and therefore, more appealing to claim as your principal residence.

    Do you have to report the sale in Canada?

    Assuming the property in question is a vacation or rental property, the sale would be reported on your Canadian tax return. In addition to your selling costs, Bob, your acquisition costs, including legal fees, renovations or improvements, can reduce your capital gain.

    Your capital gain would be calculated based on your net sale proceeds minus the acquisition cost, including renovations. You have to convert these amounts from U.S. dollars to Canadian dollars based on the applicable exchange rates.

    The Canada Revenue Agency (CRA) says you should report foreign income or expenses based on the Bank of Canada exchange rate on the date of the transaction. It will accept a different rate for the transaction date if the source is:

    • Widely available
    • Verifiable
    • Published by an independent provider on an ongoing basis
    • Recognized by the market
    • Used in accordance with well-accepted business principles
    • Used to prepare financial statements (if any)
    • Used regularly from year to year 

    Bloomberg L.P., Thomson Reuters Corporation, and OANDA Corporation meet these criteria and are “generally acceptable” to use, according to the CRA.

    U.S. tax implications of selling property in the U.S.

    The U.S. property sale will also have U.S. tax implications, even if you’re not a U.S. citizen. When a Canadian sells real estate in the U.S., they must file a U.S. tax return with U.S. capital gains tax potentially payable. This is a common requirement in other countries as well.

    The U.S. tax paid can qualify as a foreign tax credit to reduce your Canadian tax payable, Bob, to avoid double taxation.

    Jason Heath, CFP

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  • You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

    You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

    Many non-financial assets depreciate in value. Cars, furniture and other such assets tend to be worth less over time, and they are generally not subject to capital gains tax. However, there may be exceptions, such as collector cars, jewellery, artwork or antiques. You may have to report a capital gain on the sale of personal-use property that has increased in value.

    To calculate the capital gain—or loss, as the case may be—there are three rules:

    1. If the adjusted cost base (ACB) is less than $1,000, the ACB is considered to be $1,000.
    2. If the sale proceeds are less than $1,000, the proceeds are considered to be $1,000.
    3. If both are less than $1,000, there is nothing to report.

    Capital gains on personal-use property

    As a result of these three rules, personal-use assets are usually a non-issue for taxes. In rare instances where a taxpayer profits, the numbers need to be into the thousands to matter.

    Interestingly, when someone buys a burial plot, they actually buy the right to bury, or inter, someone in the plot. That is, the buyer becomes an “interment rights holder,” but they do not own the land itself. Despite this, the empty cemetery plot has value for someone else who will inherit it or buy it.

    When the deceased passed away, they were deemed to sell all of their assets, Brian. This includes the cemetery plot. So, capital gains tax would be payable on their death for any appreciation in value.

    If you, as executor, sell the plot shortly thereafter, the value will likely be similar. If there’s a profit between the time of their death and the sale of the plot, this could give rise to a capital gain for the estate.

    Selling a cemetery plot as part of an estate

    It bears mentioning, Brian, the cemetery plot may have some restrictions related to its sale. Keep in mind the land is not owned. The owner holds the right to be buried there. And the cemetery may or may not permit the private sale of interment rights.

    Since the plot has a value, it may also be subject to probate or estate administration tax, just like any other asset passing through the estate of the deceased. You should speak to the cemetery, Brian, about the rules around selling the rights to the plot. And consider the tax and probate implications of the individual’s death and the subsequent sale of their vacant cemetery plot.

    Jason Heath, CFP

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  • How real estate is taxed during a separation or divorce – MoneySense

    How real estate is taxed during a separation or divorce – MoneySense

    How an asset transfer between spouses is taxed

    First off, a transfer of assets between spouses is by default done on a tax-deferred basis at the original purchase price. So, whether the properties are held individually or jointly, either person can transfer their share of the ownership of a house and/or cottage to the other spouse without triggering an immediate tax implication.

    They can elect for the transfer to occur at any value between the adjusted cost base and the fair market value. We will come back to this point.

    Watch for spousal attribution

    When married or common-law couples transfer assets between each other, there’s always the risk of spousal attribution. This may apply if one spouse owns an asset or contributes primarily or exclusively to its purchase and transfers the asset to the other spouse. If the receiving spouse then earns income from it or sells it for a profit, there may be attribution of the income back to the transferring spouse. The income, or capital gain, would be taxable to the transferor.

    Spousal attribution does not apply after separation or divorce. So, you can transfer assets and not have to worry about future income being allocated to you down the road. However, there could be lingering tax implications for one or both individuals.

    How the principal residence exemption applies in separation or divorce

    A couple can only have one principal residence in any given tax year. Your principal residence is not necessarily the place where you primarily live. You can claim your cottage, for example, as your principal residence.

    When a separation is amicable, the couple should determine together which property, when treated as the principal residence, would result in the least amount of tax. Specifically, they should consider the annual capital appreciation of each property, calculated as the total appreciation divided by the years of ownership.

    Let’s say ex-spouses named Jo and Chris owned a cottage for a short period of time, and it appreciated significantly. They might agree to treat the cottage as their principal residence for the years they owned it. Jo could transfer full ownership to Chris, and they could jointly elect to have the transfer take place at the fair market value. Jo could claim the principal residence exemption to avoid tax in the year of transfer. Chris may be able to claim the cottage as their principal residence for all years of ownership given it will be the only property they own after the separation, and it will qualify for the principal residence exemption in subsequent years as well.

    That means Jo will have to pay tax for some years of house ownership, because the cottage was claimed as the couple’s principal residence during the years it was owned. Jo may have some years of ownership before the cottage purchase, as well as more years after the separation, where the house can be their principal residence. But they will have to pay some capital gains tax eventually when they sell the house. It will be based on the total appreciation when they sell it, or die, and the pro-rated years where the couple claimed the cottage relative to the total years of ownership.

    Jason Heath, CFP

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  • How much is capital gains tax in Canada?—and other questions answered – MoneySense

    How much is capital gains tax in Canada?—and other questions answered – MoneySense

    If you are going to sell next year, it is worth paying $833 of tax a year earlier? Think of it like debt. Imagine you can buy a refrigerator and you can pay $2,500 today or you can pay $3,333 in a year. Paying in a year costs you 33.33% more. That is a pretty high financing charge. 

    What about paying that $3,333 in five years? That would be like paying 5.9% interest. Not bad, right? But, because you are paying the so-called “interest” with after-tax dollars, I would say you want a lower interest rate than 5.9% to make it worth it. In other words, if your investments are only earning 5% to 6% per year pre-tax (less after tax), it may not be worth it to effectively pay 5.9% more annually. 

    For most investors earning a reasonable, mid-single-digit return, you might need to hold an asset for closer to 10 years to end up coming out ahead. 

    I am not suggesting you sell everything you expect to sell in the next 10 years before June 25. The budget proposals could be changed before enacted. A new government could change the rules again. You may have personal circumstances that make things different for you. 

    The point here is that if someone is very likely to sell an asset in the next few years that will be subject to the higher inclusion rate, there may be an advantage to doing so before June 25. And, that would generally apply to corporations. For individuals, only assets that would lead to more than $250,000 of tax in a single year.

    Ask MoneySense

    My wife and I own a cottage that will eventually be passed on to our children and at that point it will be a deemed disposition. My question is: Can the capital gain of, say, $600,000 be split up between both of us, each getting $250,000 at 50% and the remaining $100,000 at 67%?

    –Ian

    Can you split capital gains between spouses in Canada?

    When you die, you have a deemed disposition of assets. That would include a cottage. Although a cottage can qualify for the principal residence exemption, I will assume, Ian, you have a home where you live for which you would instead claim this exemption. 

    You can leave a cottage to your spouse and have it pass to them at its adjusted cost base without triggering tax. But you have the option of having the transfer value at any price between the cost base and the fair market value. If anyone other than your spouse inherits, there is capital gains tax payable. 

    This creates an interesting situation with these new changes. If a taxpayer dies and leaves a cottage to their spouse with a capital gain of more than $250,000, there may be situations where you want to declare a partial capital gain on the first death. If the surviving spouse is older, this may be more worth considering. If they are younger, it can be a tougher decision to make to prepay tax that could otherwise be paid many years in the future. 

    Jason Heath, CFP

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  • What are covered call ETFs, and are they good investments? – MoneySense

    What are covered call ETFs, and are they good investments? – MoneySense

    First, what is a covered call, anyway?

    A call option is an agreement that gives a buyer the right to buy a stock at a predetermined price in the future. The seller is compensated for giving the call option buyer the right (or the option) to buy the investment they own. The option is “covered” if the seller owns the underlying stock. Canadian investors can “write” (sell) a covered call option when they want to reduce the risk of owning an investment.

    In 1999, Mark Cuban (the minority owner of the Dallas Mavericks but better known as a panellist on Shark Tank) sold Broadcast.com to Yahoo!, and in return received 14.6 million shares of the company. Cuban was forced to hold Yahoo’s shares (likely due to a lock-in period) and implemented a version of covered calls to protect his position, explains Koivula. 

    In the example above, Mark Cuban can give another investor the right to purchase one share of Yahoo—let’s say at $100 per share—at a future date. For simplicity’s sake, we’ll assume Cuban’s Yahoo shares are worth $95 each, so he was able to sell the option for, say, $4. Here are two hypothetical outcomes: 

    • Scenario 1: Yahoo’s shares move up to $110 per share. The counterparty exercises their option to buy at $100, and Cuban has to sell it to them at that price. He misses out on the $15 gain, but still has the $4 from selling the option. Cuban ends with $99 instead of the $110 he would have if he hadn’t sold the option.
    • Scenario 2: Yahoo’s shares fall to $90 per share. The counterparty doesn’t exercise the option because they wouldn’t buy shares for $100 that they could buy for $90. Cuban has lost $5 on the value of his Yahoo share. However, the loss has been offset by the $4 premium from selling the option. Cuban ends with $94 instead of the $90 he would have if he hadn’t sold the option.

    You can see that the covered call acts as a kind of dampener on the investor’s overall return, while giving them immediate income ($4 in the example above).

    What are covered call ETFs? 

    Most Canadian investors don’t implement options trades. But they can own covered call ETFs. Covered call ETF providers step in to implement this trade on investors’ behalf, with a larger pool of funds. Global X’s S&P 500 Covered Call ETF (XYLD) is a well-known example of a covered call ETF. In Canada, examples include RBC’s Canadian Dividend Covered Call ETF (RCDC) and CI’s Gold+ Giants Covered Call ETF (CGXF). Use a Canadian ETF screener to find more.

    Why are covered call ETFs gaining traction? 

    Many Canadian retail investors are seeking the highest dividend or yield that they can find in an ETF. In many cases, covered call ETFs come up near the top of that search, says Koivula.

    Some of his own clients see covered call ETFs offering eye-popping yields, and they decide to further investigate the opportunity. Indeed, as of Feb 14, 2024, XYLD paid a 10.6% 12-month trailing yield, which, on face value, is a very strong income yield. 

    ETFs like this can work well in the short-run. Koivula points out that clients like that they’re “getting paid to wait” if they think markets will be flat or down.

    Jun Ho

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  • Should you buy life insurance to pay for tax owed upon death? – MoneySense

    Should you buy life insurance to pay for tax owed upon death? – MoneySense

    Capital gains tax, Nazim, might apply to some of your assets. If you own non-registered stocks or a rental property, for example, they might be subject to a capital gain on your death. Your home would likely be sheltered by the principal residence exemption. A tax-free savings account (TFSA) is tax free, whereas a registered retirement savings plan (RRSP) is not subject to capital gains tax, but is subject to regular income tax. Your RRSP, unless left to a spouse, is generally fully taxable on top of your other income in the year of your death.

    The tax is payable by your estate, so although it reduces the inheritance left to your beneficiaries, it’s not payable directly by them. It can be paid with the assets that make up your estate.

    Hard versus soft assets

    You mention that your estate is made up of hard and soft assets, Nazim. I assume by hard assets you mean real estate. And by soft assets you mean cash, stocks, bonds, mutual funds and/or exchange-traded funds (ETFs).

    Your soft assets can be very liquid and used to pay the tax that your estate owes. That tax is not due until April 30 of the year following when your executor files your final tax return. If you die between November 1 and December 31, there is an extension to six months after your death for your executor to file your tax return and pay the tax owing. So, there’s always at least six months to come up with the funds required to pay income tax on death, and there’s more than six months when a death occurs between January 1 and October 31.

    Since soft assets are considered sold upon death, there is generally no advantage for your beneficiaries to keep those assets rather than turn them into cash or into other investments of their choosing.

    Your hard assets, Nazim, are obviously less liquid. If there is a special property, like a family cottage or a rental property, they choose to keep, I can appreciate how you might want to make sure they can do that without being forced to sell.

    Should you buy insurance to cover tax owed upon death?

    Your cash and investments may provide sufficient funds to pay taxes owed upon death. Or your beneficiaries may choose to sell one or more of your real estate properties. You could buy life insurance to pay the tax, but I find this strategy is oversold or misunderstood. I will explain with an example.

    Let’s say you are 62 years old, and your life expectancy is another 25 years, based on your current health. If you buy a life insurance policy that requires a level premium of $5,000 per year for life, and you pay that premium for 25 years, you will have paid $125,000 to the insurance company. If you instead invested the same amount each year at a 4% after-tax rate of return, you would have accumulated $216,559 after 25 years.

    Jason Heath, CFP

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  • How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

    How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

    Unless taxpayers make a request, there are no withholding taxes on the minimum RRIF withdrawal. This can result in the Canada Revenue Agency (CRA) requesting quarterly tax installments in the future: after filing a tax return where net taxes owing (taxes owing less the taxes deducted at source) exceed $3,000. 

    If this looks to be an annual event, it’s wise to pay the tax installments, as the CRA will charge installment interest on the amounts outstanding or paid late, Ardrey says. “That rate of interest is currently at 10%.” 

    (Of course, if you overpay installments, the CRA will not pay you any interest.)

    Withholding taxes is another consideration. These are not the same as your final tax bill (after you die), Birenbaum says, but instead are “a default percentage the government takes upfront to ensure they get (at least some) tax on RRSP or RRIF withdrawals.” If you’re in your 60s and have ever taken money from your RRSP, you know you pay 10% withholding tax for withdrawals of $5,000 or less, 20% between $5,001 and $15,000, and 30% over $15,000. Amounts are higher in Quebec.

    But the rules are different for RRIFs; there are no withholding taxes required on minimum withdrawals. Outside Quebec, withholding taxes are the same for RRSPs, says Birenbaum. For systematic withdrawals, withholding taxes are based not on each individual payment but on the total sum requested in the year that exceeds the minimum mandated withdrawal. 

    You don’t necessarily want to pay the least in withholding taxes, as many may know from making RRSP withdrawals in their 60s. You can always request paying a higher upfront withholding tax on RRIF withdrawals, if you expect to owe more at tax-filing time due to other pension and investment income. You can also set aside some RRIF proceeds in a savings account dedicated to future tax liabilities. 

    Do RRIFs trigger OAS clawbacks?

    Another complication of extra RRIF income is that it can trigger clawbacks of Old Age Security (OAS) benefits. If your total income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero.  

    Income splitting with a RRIF

    Fortunately, there are ways to minimize these tax consequences. If you are one half of a couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on a tax return when appropriate, providing the taxpayer is over 65. An income split of $2,000 can provide a pension tax credit for the spouse, which could be the difference between being impacted by the OAS clawback or not.

    Jonathan Chevreau

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  • Can you save on taxes by owning an investment account with your child? – MoneySense

    Can you save on taxes by owning an investment account with your child? – MoneySense


    When you give cash or assets to a family member to invest, there may be attribution of that income back to you. Attribution causes income to be taxed on the original taxpayer’s income tax return. Attribution applies:

    • Between spouses. So, if a high-income spouse gives money to their low-income spouse to invest, with the goal of reducing their tax payable, the attribution rules apply.
    • To some income between a parent and a minor child. Interest and dividends are taxable back to the parent, but capital gains are taxable to the child. So, you can accomplish some income splitting with a minor child.

    Attribution does not apply between a parent and an adult child, unless the funds are loaned to the adult child at a low interest rate or at no interest rate. In the case of a low- or no-interest loan, where it seems the intention is not to truly gift the money, but to reduce tax payable on the income for a period of time, there is attribution. As with a minor child, it applies to interest and dividends, but not capital gains.

    Can you avoid capital gains tax by gifting an asset?

    When an asset is outright gifted to a child, there’s a deemed disposition. The asset is considered to be sold to the child at the fair market value, and any accrued capital gains become taxable. So, you cannot avoid tax by gifting an asset, like a cottage, for one dollar, for example.

    It does not appear you have made a gift to your son, Jing. You intend to continue to report the income. So, there is no capital gain and there is no attribution. You should just continue to report the income on your tax return.

    Legal ownership vs beneficial ownership

    This is a case where legal ownership—whose name is on an asset—does not match the beneficial ownership—who technically owns the asset. Legally, the account is joint. Beneficially, the account belongs to you.

    This creates tax consequences for you that may be unintended. Trust rules have changed for 2023 and future tax years. If you have an account, like your brokerage account, Jing, where the legal and beneficial ownership are different, you need to file a special tax return.

    New trust reporting rules for 2023

    A T3 Trust Income Tax and Information Return is used by trusts to report trust income as well as information about the settlor, trustees and beneficiaries of the trust. Although you may not have established a trust with a lawyer, or even consider this joint account to be a trust, the Canada Revenue Agency (CRA) considers it a trust.

    The CRA makes an exception for “trusts that hold less than $50,000 in assets throughout the taxation year (provided that the holdings are confined to deposits, government debt obligations and listed securities).”



    Jason Heath, CFP

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  • How to calculate the adjusted cost base of inherited property – MoneySense

    How to calculate the adjusted cost base of inherited property – MoneySense


    When you inherit real estate, any accumulated tax, if applicable, is generally paid by the estate of the deceased. This is because when a taxpayer dies, they are deemed to have sold their assets on their date of death, and any tax payable is calculated on their final tax return.

    Property inherited from a spouse or common-law partner

    One exception is for real estate left to a surviving spouse or common-law partner. If you inherited this building from your spouse or common-law partner, Bill, it may not be the property’s 2003 value that you need to determine.

    By default, capital assets pass to a surviving spouse or common-law partner at their original cost, unless the executor of the deceased elects otherwise. In this case, you would declare any change in value between the original cost of the property and its fair market value at the time of sale. If the deceased taxpayer is in a low tax bracket in their year of death or has tax deductions or tax credits to claim, a value that is higher than the original cost may be reported.

    A capital asset’s original cost is referred to as the adjusted cost base (ACB), and it’s based on: the original acquisition price (typically the purchase price); acquisition costs (like land transfer tax for real estate); and adjustments over the years (like renovations for real estate or reinvested dividends for a stock).

    What to do when the adjusted cost base is unknown

    Assuming you did not inherit this property from your spouse or common-law partner, Bill, you would need to know the value of the property at the time you inherited it. It should be the fair market value of the property reported on the tax return of the person you inherited it from in 2003. If the building was their principal residence, it may not have been reported.

    Assuming you have no record of that value, you could estimate the value on your own. If that’s not easy to do, you can have a realtor look up sales of comparable buildings in the same area around 2003 to try to determine a value. A designated appraiser may be the professional best equipped to provide a valuation based on historical sales data, if it’s available. A formal valuation by the Canada Revenue Agency is an option, but it is not required for your tax filing.

    Don’t forget about renovations and rental income

    If you have done any renovations to the property since inheriting it, Bill, those renovations may have increased your ACB. Capital improvements are added to the original acquisition cost (the property’s value when you inherited it, in your case) to determine your tax cost in the year of sale.

    If the property was a rental property, you may have claimed capital cost allowance or depreciation to reduce the net rental income in some or all of the years you owned it. Those past tax deductions are recaptured in the year of sale and included in your income.



    Jason Heath, CFP

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  • How to carry back a capital loss for a tax refund – MoneySense

    How to carry back a capital loss for a tax refund – MoneySense

    It sounds like you are aware that you can carry back capital losses, Ramesh. If you have a net capital loss on your 2023 tax return, you can carry it back up to three years. So, you can ask the Canada Revenue Agency (CRA) to apply that loss to capital gains you had in 2022, 2021 or 2020.

    When should you carry back a capital loss?

    You can apply some or all of the loss to one or more of those years. If you had capital gains in more than one of the past three years, there are three primary considerations.

    1. 2023 is the final year you can carry back losses to 2020. In 2024, the furthest you can carry back a capital loss is 2021.

    2. If you had a high income in one of those three years, you might be better off carrying the loss back to the year with the highest income. That way, you can maximize the resulting tax refund.

    3. If your income and tax rate were relatively low in one or more of the past three years, you might want to defer claiming the loss. Capital losses can be carried forward indefinitely to use against capital gains in a future higher-income tax year.

    You are not restricted, Ramesh, to claiming a capital loss on securities against a capital gain on securities. So, in your case, you could carry back a capital loss on securities to claim against a previous capital gain on a rental property.

    How to carry back a capital loss

    In order to carry back a capital loss, you have to complete Section III – Net capital loss for carryback on Form T1A, Request for Loss Carryback on your tax return. Although it can be printed, filled out and submitted to the CRA, a taxpayer or their accountant would generally submit the form as part of their annual tax filing.

    After your tax return for the current year is assessed, you will later receive a notice of reassessment from the CRA with a tax refund for a previous year, if applicable.

    Jason Heath, CFP

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  • Can you file multiple years of income taxes together in Canada? – MoneySense

    Can you file multiple years of income taxes together in Canada? – MoneySense

    That’s important in an increasingly digital world. Hard copy does matter. For example, if you’ve closed bank accounts, says Wall, you may not be able to get the statements you need to file past years’ tax returns, especially if you don’t have the receipts or invoices.

    If you just have a T4 and no claims for discretionary expenses like childcare, medical, moving expenses, donations or tuition fees, your documentation requirements will be simpler, but if you have those expenses to claim, you’ll need some kind of documented proof.

    This is important because the CRA says all documents must be legible and reproducible. Wall says in some cases the documents, like medical expenses or receipts for a small business, don’t have to be original copies. It can be a scan—CRA is increasingly asking for electronic receipts. However, credit card or bank statements are not valid for these claims—you need to keep the receipts.

    “You can go ahead and file a return and if you’re never audited, you might be fine,” he says. “But if you file the return and it gets audited, and you can’t produce the receipts, then they will deny those expenses, and could turn a refund into a balance due.” He says that usually, when someone is filing multiple years that are late, your probability of getting audited increases, especially if you’re self-employed. Filing late in those cases will attract those late filing and potentially gross negligence penalties to add to the tax burden.

    Can you avoid interest on tax returns owed for multiple years?

    Penalties and interest happen when you file late and owe the government money. They can also happen after an audit, when CRA disagrees with your claims.

    In some cases, it is possible to plead “hardship” under the Taxpayer Relief Program. For example, if an extraordinary circumstance caused you to miss filing a return, such as a death in the family, serious illness or other serious circumstance. Certain delays in resolving an audit or incorrect information provided by the CRA may have caused you to be unable to fulfill your obligations, and you can apply for relief in those cases too. File the Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties and Interest to request relief. Sometimes financial hardship can be used as a reason for a relief request, but detailed records must be submitted.

    But if you want to get prosecution relief, possible penalty relief and partial interest relief, you can take advantage of the Voluntary Disclosure Program. You have to voluntarily come forward to fix any mistakes in your tax filings before the CRA knows or contacts you about it. The program is open to any taxpayer, from individuals, employers, and corporations to partnerships and trusts.

    You will have to pay the taxes owed plus either the full or partial interest, but you may receive some form of relief, based on the discretion of the CRA.

    Renée Sylvestre-Williams

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