Tag: Capital Gains Tax

How to file your taxes when you own ETFs – MoneySense

Both types of investments are subject to tax in your taxable accounts, like non-registered or corporate accounts. Tax-free savings accounts (TFSAs) are tax-free, so you don’t receive tax slips for TFSA investments, nor do you report the income or capital gains on your tax return.

Does the ACB of TFSA investments matter?

You ask about calculating the adjusted cost base (ACB) in your TFSA. Knowing the ACB is necessary in taxable accounts, but not in your TFSA. The ACB determines whether you’re selling an investment for a capital gain or a capital loss. Your brokerage often calculates the ACB for you, representing your purchases of the investment, including reinvested dividends or other adjustments.

Mutual funds are typically structured legally as trusts, so investors in taxable accounts get T3 Statement of Trust Income Allocations and Designations slips. Some mutual funds are structured as corporations, so investors instead receive T5 Statement of Investment Income slips.

In this respect, ETFs are similar to mutual funds, Barbara. Typically, they are structured as trusts and come with T3 slips, though some are corporations that come with T5 slips.

When are T3 slips typically issued?

Mutual fund and ETF issuers have until March 31 to provide T3 slips to investors, which is one of the challenges of investing in these funds. With the March 31 deadline, some investors don’t receive their T3 slips until April. So, it may be tough to file your tax return in March, unless you’re open to the possibility of filing an adjustment to your tax return for any late T3 slips.

Mutual fund and ETF trusts generally flow through all of their income and capital gains to investors. This means that if the fund buys and sells underlying assets for a capital gain, that capital gain is reported by the investor and taxable to them. This can result in a capital gain even if the investor has not sold any of their units of the fund.

For a Canadian investor, Barbara, one key distinction between mutual funds and ETFs is that ETFs can be purchased on a foreign stock exchange. Mutual funds are domiciled in Canada and are in Canadian dollars. A Canadian investor can buy ETFs that trade in the U.S. in U.S. dollars. This introduces foreign-exchange calculations to the taxation of these investments in taxable accounts.

How U.S.-dollar ETFs are taxed in Canada

When you sell a U.S.-dollar ETF, you need to report the sale in Canadian dollars based on the prevailing exchange rate at that time. You also need to calculate your cost in Canadian dollars based on the exchange rate—or rates—at the time of purchase. This can make for a little more work, especially if your ETF distributions are being reinvested.

Jason Heath, CFP

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December 18, 2023
How to fill out a personal tax return for 2023 – MoneySense
- The basic personal amount
- The age amount
- Amounts for spouse and dependents
- Adoption expenses
- CPP and/or QPP contributions
- Employment insurance premiums
- Home buyers and home accessibility amounts
- Digital news subscription expenses
- Tuition/education/textbook amounts (complete Schedule 11)
- Medical expenses
- Donations and gifts (fill out Schedule 9)
Part C, Net federal tax:

There are more opportunities for tax reductions in this section, including the common dividend tax credit and the less common minimum tax carry forward on split income and political contributions tax credits. The advance received on the Canada Worker’s Benefit by lower income earners is also recorded here.

Step 6: Refund or balance owing

You’ve reached the final stage where you’ll find out whether you will receive a tax refund or if you owe taxes. If you are self-employed, remember to add payable CPP and EI premiums here. The social benefits repayment on EI or OAS also appears here. Finally, provincial taxes computed on provincial tax forms will be added.

Now, onto the top of the last page of the T1 General form. This is where you enter the income tax deducted from your various slips and claim your final set of applicable tax credits, overpayments and rebates. This can include some provisions that really add up to reduce taxes or provide a bigger refund, including overpayments to the CPP and EI, the Canada Workers Benefit, the Canada Training Credit, the eligible educator school supply tax credit, and so on. Seniors, self-employed and other Canadians subject to making quarterly tax installments will also want to record the money paid to reduce their tax bill. Finally, available refundable provincial tax credits are reported.

If your total credits exceed taxes payable, you may receive a tax refund. Specifically, if you have a negative amount, enter it where indicates you have a refund. If you have a positive amount, enter it on the line that indicates you have a balance owing.

Once you file your tax return, if you owe any taxes, you can pay online using online banking, credit card or pre-authorized debit.

If you’re expecting a tax refund, you should receive it within two weeks if you filed online, eight weeks if you filed by paper, or 16 weeks if you live outside of Canada or file a non-resident tax return. If you sign up for direct deposit, you will receive your refund faster than waiting for a cheque in the mail.

Obviously, every Canadian’s tax situation is unique to them and to every year they file. So, if you’re ever in doubt, it’s a good idea to seek out a qualified accountant or a tax professional who can verify that your tax return is completed properly. Tax software can double-check for any missing information and catch many errors. But it can’t always apply for new provisions you haven’t told it about or represent you in case you are audited by the CRA.

Step 7: Review your NOA

It can take up to two weeks to receive a Notice of Assessment (NOA) if you file electronically. However, it can take up to eight weeks to receive your NOA if you file by paper.
Sandy Yong

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December 13, 2023
The tax implications of buying a second home in Canada – MoneySense
Primary residences vs. secondary properties

The tax treatment of real estate in Canada depends on its use. The home you live in—your primary residence—is normally exempt from capital gains tax upon sale due to the primary residence exemption.

This exemption can even be used on vacation properties, so long as it is “ordinarily inhabited.” While the definition of “ordinarily inhabited” is vague, it means at a minimum you spent time living there during a calendar year. And while there’s an exception for years in which you move and own two homes, you can otherwise only declare one property as your primary residence at any given time. Generally speaking, you’ll want to apply the exemption to the property that has increased in value the most.

Rental properties don’t qualify for this exemption under most circumstances. When they’re sold, if they have increased in value, capital gains taxes will normally apply.

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Capital gains tax on a second property in Canada

When selling a property, if you can’t use the primary residence exemption, then capital gains taxes will be levied against the increase in value. But capital gains are relatively tax-efficient, since only half of the gain is taxable—the other half you can stick in your jeans.

To calculate the capital gain, you need to first calculate the adjusted cost base, or ACB, against which the sale proceeds will be measured. The starting point is the purchase price, and from there certain additions and deductions can be applied. Common additions include expenses incurred to purchase the property, like commissions and legal fees. Capital expenses, like those used to improve or upgrade the property, can also be added.

Here’s where it gets a little complicated. Because a building is depreciable property which may wear out over time, investors can deduct a percentage of the property’s cost each year—known as “capital cost allowance,” or CCA. It can only be used against the building itself, not the land portion of the property. When the property is eventually disposed of, the undepreciated capital cost, or UCC—that is, the original cost minus the amount of CCA claimed—is recaptured and taxed as income, with additional proceeds being taxed as a capital gain.

As a simplified example, say you bought a rental property for $1,000,000. Over the years, you deducted $200,000 of CCA. You then sold the property for $1,300,000. Here’s how it would be taxed:
- Original cost: $1,000,000
- CCA claimed: $200,000
- Undepreciated capital cost: $800,000
When the rental property is sold, that $200,000 CCA is recaptured and taxed as income. And since you sold it for $1,300,000, you have a capital gain of $300,000. Half of this is taxable, so you add $150,000 to your income that year. Between the recapture and the taxable half of the capital gain, you have $350,000 of income to report on your tax return.

Capital expenses vs. current expenses: What’s the difference?

In the above example, the cost of improving the property is a capital cost. It extends the useful life of the property or increases its value. Capital expenses can increase the ACB of the property and can be deducted over time via the CCA. Examples include:
Mark McGrath, CFP, CIM, CLU

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November 23, 2023
RRIF withdrawals: What should seniors with million-dollar portfolios do? – MoneySense

Registered retirement income fund (RRIF) withdrawals are fully taxable and added to your income each year. You can leave a RRIF account to your spouse on a tax-deferred basis. But a large RRIF account owned by a single or widowed senior can be subject to over 50% tax. A RRIF on death is taxed as if the entire account is withdrawn on the accountholder’s date of death.

What is the minimum RRIF withdrawal?

Minimum withdrawals are required from a RRIF account each year, and in your 80s, they range from about 7% to 11%. For you, Amy, this would mean minimum RRIF withdrawals of about $200,000 to $300,000 each year. This would likely cause your marginal tax rate to be in the top marginal tax bracket. Sometimes, using up low tax brackets can be advantageous, but you do not have any ability to take additional income at lower rates.

RRIF withdrawals: Which tax strategy is best?

Taking extra withdrawals from your RRIF when you are in the top tax bracket is unlikely to be advantageous. Here is an example to reinforce that.

Say you took an extra $100,000 RRIF withdrawal and the top marginal tax rate in your province was 50%. You would have $50,000 after tax to invest in a taxable account. Now say the money in the taxable account grew at 5% per year for 10 years. It would be worth $81,445.

By comparison, say you left the $100,000 invested in your RRIF account instead. After 10 years at the same 5% growth rate, it would be worth $162,890. If you withdrew it at the same 50% top marginal tax rate, you would have the same $81,445 after tax as in the first scenario.

The problem with this example is the two scenarios do not compare apples to apples. The 5% return in the taxable account would be less than 5% after tax. And the same return with the same investments in a tax-sheltered RRIF would be more than 5%. As such, leaving the extra funds in your RRIF account should lead to a better outcome.

So, in your case, Amy, there is not an easy solution to the tax payable on your RRIF. You can pay a high rate of tax on extra withdrawals during your life, or your estate will pay a high rate on your death. Given you do not need the extra withdrawals for cash flow, you will probably maximize your estate by limiting your withdrawals to the minimum.

Should you donate your investments to charity?

You mention donating securities with capital gains. If you have non-registered investments that have grown in value, there are two different tax benefits from making donations.

Jason Heath, CFP

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November 13, 2023
How is passive income taxed in Canada? – MoneySense

A corporation’s investment income is generally taxable at between about 47% and about 55%, depending on the corporation’s province of residence. This includes interest, foreign dividends and rental income.

Canadian dividend income earned by a corporation is generally subject to about 38% tax, although dividends paid between two related corporations may be tax-free (i.e. paying dividends from an operating company to a holding company).

For a corporation, capital gains are 50% tax-free—just as they are for individuals—such that corporate tax on capital gains ranges from about 23% to about 27%.

Rental income

Rental income is fully taxable personally and corporately at regular tax rates. So, this means 31% for an Ontario resident with $100,000 of income, for example, and between 47% and 55% corporately depending on the corporation’s province or territory of residence.

The caveat is that only net rental income is taxable. A rental property investor can deduct eligible rental expenses including, but not limited to, mortgage interest, property tax, insurance, utilities, condo fees, professional fees, repairs and related costs.

Income in an RRSP

Registered retirement savings plan (RRSP) accounts are tax-deferred with tax payable on withdrawals. However, there are tax implications to owning investments in your RRSP and other registered retirement accounts.

Foreign dividends are generally subject to withholding tax before being paid into your account or an RRSP investment at rates ranging from 15% to 30% (in the case of a mutual fund or ETF). In a taxable account, this withholding tax does not matter as much because you generally claim a foreign tax credit to avoid double taxation. In an RRSP, the foreign withholding tax is a direct reduction in your investment return with no way to recover the tax. This does not mean you should avoid foreign investments in your RRSP. It is simply a cost of diversifying your retirement accounts.

One exception is U.S. dividends. If you buy U.S. stocks or U.S.-listed ETFs that owned U.S, stocks, there is no withholding tax on dividends paid in your RRSP. If you own an ETF that owns U.S. stocks that trades on a Canadian stock exchange, or you own a Canadian mutual fund that owns U.S. stocks, there will be 15% withholding tax on the dividends of the underlying stocks before they are paid into the fund.

Jason Heath, CFP

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November 7, 2023
Opinion: Why millionaires like us want to pay more in taxes | CNN

Editor’s Note: Abigail Disney is an Emmy-winning documentary filmmaker, activist, and member of the Patriotic Millionaires. Her latest film, “The American Dream and Other Fairy Tales,” co-directed with Kathleen Hughes, made its world premiere at the 2022 Sundance Film Festival. Morris Pearl is the chair of Patriotic Millionaires, and former managing director of BlackRock. The opinions expressed in this commentary are their own. View more opinion on CNN.

CNN
—

Tuesday is Tax Day in America, one of the most stressful days of the year, when many taxpayers will finally end their procrastination, file their federal returns, and hope for a refund from the IRS. But for many of the nation’s wealthiest, it’s just another Tuesday.

Tax Day isn’t just a filing deadline — it’s also an annual reminder that the ultra-rich exist in an entirely separate world when it comes to taxes. For us, the loopholes are bigger and the rates are sometimes lower. Meanwhile, the rich keep getting richer, with the wealth of billionaires in particular growing by more than $1.5 trillion over the last few years.

This status quo is unfair, but even more importantly, it’s unsustainable. Such high levels of inequality are pushing our economy and our democracy to their breaking points. That’s why we should examine how we can set our country up for long-term stability and prosperity. And we should start by ensuring that the ultra-rich pay more of what they owe the country that made their success possible.

There are three changes to the tax code that would help us do just that:

Right now, the US tax system values money over sweat. If you work hard for your money instead of earning it passively, you’re essentially penalized for it. People who earn a salary pay significantly higher tax rates on their income than wealthy investors who passively earn capital gains income.

Inheriting money is an even better deal. Thanks to former president Donald Trump’s 2017 tax law, the first $12.92 million (or $25.84 million for a married couple) is completely exempt from any estate tax, and the stepped-up basis loophole allows wealthy families to permanently erase millions in capital gains taxes by resetting the market value of those assets to their value at the time of the original owner’s death. With this, it becomes relatively simple for the rich to inherit tens, even hundreds of millions of dollars, and pay almost nothing in taxes. Someone working for that money, on the other hand, would pay over a third of it in federal income taxes.

Why do we have a tax code that says working people should be taxed more than wealthy investors and those who got rich just by virtue of being born into the right family? At the end of the day, money is money, whether you worked for it or whether you inherited it. As an heiress and an investor, we should not be paying lower tax rates than people who earn their money from working.

It’s time for the tax code to treat all income equally by taxing all capital gains over $1 million at the same rates as ordinary income, and replacing our loophole-ridden estate tax with a simpler inheritance tax that treats inherited wealth as income.

We can’t just focus on income, however, because many of the richest Americans earn basically no taxable income of any kind in a typical year. Capital gains are only taxed when assets are sold, so instead of selling them, the ultra-rich use their assets as collateral to borrow vast sums of money at extremely low interest rates to live on, and then declare little or even negative “income” on their tax forms. This “Buy, Borrow, Die” strategy is a major reason billionaires paid a lower effective tax rate over recent years than working-class families.

By rethinking what is taxable, we can get access to the trillions of dollars of billionaire wealth that is untouchable under our current tax structure. That’s why President Biden has proposed the Billionaire Minimum Income Tax, which would tax the unrealized capital gains of the wealthiest households and why others have proposed wealth taxes on billionaires.

Finally, one of the most straightforward changes needed is to simply tax the extremely rich more than the merely rich. Our income tax caps out at a top rate of 37% for any income over $578,125 (or $693,750 for married couples). No matter how much more someone makes, they’ll never pay more than 37% in federal income taxes.

While someone earning $600,000 is certainly making enough to live a very comfortable life, they’re in a different world than someone making $600 million a year. In order to reflect the real differences between the rich and the ultra-rich, we need to return to the top rates we had through the most prosperous decades of the 20th century and add significantly more tax brackets. They should reach up to 90% for people making more than $100 million a year.

These three changes certainly won’t fix all our country’s problems on their own, but they would go a long way in stopping the steady flow of our country’s wealth toward a smaller and smaller group of people, a change that would make both our democracy and our economy more stable. The tax code can be a powerful tool for both social and economic change. We just need to use it more effectively.

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April 17, 2023
IRS releases new federal tax brackets and standard deductions. Here’s how they affect your family’s tax bill.

America’s high inflation rate will produce a 7% increase in the size of the standard deduction when workers file their taxes on their 2023 income, according to new inflation adjustments from the Internal Revenue Service.

It’s also going to pump up tax brackets by 7% as well, according to the annual inflation adjustments the IRS announced this week.

Many tax code provisions — but not all — are indexed for inflation, so the announcements are a recurring event. But when inflation is persistently clinging to four-decade highs, these annual adjustments carry extra significance.

“When inflation is persistently clinging to four-decade highs, these annual adjustments of approximately 7% for the standard deduction carry extra significance.”

Start with the standard deduction, which is what most people use instead of itemizing deductions.

The standard deduction for individuals and married people filing separately will be $13,850 for the 2023 tax year. That’s a $900 increase from the $12,950 standard deduction for the upcoming tax season.

For married couples filing jointly, the payout climbs to $27,700 for the 2023 tax year. That’s a $1,800 increase from the $25,900 standard deduction set for the upcoming tax year.

The increases in the marginal tax rates reflect the same 7% rise. For example, the 22% tax bracket for this year is over $41,775 for single filers and over $83,550 for married couples filing jointly. Next year, the same 22% bracket applies to incomes over $44,725 and over $89,450 for married couples filing jointly.

MarketWatch/IRS

“The changes seem to be much larger than previous years because inflation is running much higher than it has in previous decades,” said Alex Durante, economist at the Tax Foundation, a right-leaning tax think tank.

The IRS arrives at its inflation adjustments by averaging a slightly different inflation gauge, the so-called “chained Consumer Price Index” instead of the widely-watched Consumer Price Index, Durante noted. That’s an outcome of the Trump-era Tax Cuts and Jobs Act of 2017, he added.

“The reason they do this is because the regular CPI is thought to overstate inflation because it doesn’t take into account the substitution that shoppers can make as cost rise,” Durante said. Shoppers substitute when they swap a more expensive item for cheaper one, and research shows many Americans are using the tactic.

The IRS inflation adjustments come after September CPI data last week showed inflation of 8.2% year-over-year, slightly off from 8.3% in August. Also last week, the Social Security Administration said next year’s payments would include an 8.7% cost of living adjustment.

“The payout on the earned income tax credit — geared at low- and moderate-income working families who have been hit hard by red-hot inflation — is also increasing. ”

The payout on the earned income tax credit is also increasing. The maximum payout for a qualifying taxpayer with at least three qualifying children climbs to $7,430, up from $6,935 for this tax year. The longstanding credit is geared at low- and moderate-income working families who have been hit hard by red-hot inflation.

More than 60 provisions are slated for an increase inline with inflation, but many portions of the tax code are not indexed for inflation. Depending on the circumstances, the taxes or the tax breaks kick in sooner.

Capital gains tax rules one example. The IRS lets a taxpayer use capital losses to offset capital gains taxes. If losses exceed gains, the IRS allows a taxpayer to deduct up to $3,000 in excess loses. They can then carry the remainder of the capital loses to future tax years. It’s been more than four decades since lawmakers last set the limit, according to Durante.

“While more than 60 provisions are slated for an increase inline with inflation, many portions of the tax code are not indexed for inflation. They include capital gains tax. ”

Given the stock market’s rocky downward slide this year, many investors might welcome a fast-approaching tax break — even if it only enables a $3,000 deduction.

At the same time, a married couple selling their home can exclude the first $500,000 of the sale from capital gains taxation, and it’s $250,000 for a single filer. It’s been that way since the exclusion’s 1997 establishment.

The once white-hot housing market may be cooling, but many sellers may still be facing the point when taxes kick in. The median home listing was over $367,000 as of early October, according to Redfin
RDFN,
+2.29%.

The child tax credit is another example. After the payout to parents last year jumped to $3,600 for children under age 6 and $3,000 per child age 6 to 17, it’s back to a maximum $2,000. The credit’s refundable portion climbs from $1,500 to $1,600 during tax year 2023, the IRS notes.

Proponents of the boosted payouts and some Congressional Democrats want to revive the larger payments in negotiations tied to corporate taxes. The high costs of living are a strong reason to bring back the boosted credit, they say.

Related:

What smart strategies can lower your tax bill as year-end approaches? Read this before making any tax moves.

Three things the best 401(k)s offer that can help you save a lot more

Enhanced child tax credit helped reduce poverty for families before it ended last year. But there’s one way Republicans and Democrats could agree on reinstating it.

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October 22, 2022