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Tag: capital gains

  • 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

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    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).”

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    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

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    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.

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    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

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    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.

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    Jason Heath, CFP

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  • How to file your taxes when you own ETFs – MoneySense

    How to file your taxes when you own ETFs – MoneySense

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    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.

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    Jason Heath, CFP

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  • The tax implications of buying a second home in Canada – MoneySense

    The tax implications of buying a second home in Canada – MoneySense

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    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:

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    Mark McGrath, CFP, CIM, CLU

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  • RRIF withdrawals: What should seniors with million-dollar portfolios do? – MoneySense

    RRIF withdrawals: What should seniors with million-dollar portfolios do? – MoneySense

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    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.

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    Jason Heath, CFP

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  • How is passive income taxed in Canada? – MoneySense

    How is passive income taxed in Canada? – MoneySense

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    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.

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    Jason Heath, CFP

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  • Centibillionaire Jeff Bezos moves to Florida, where his parents live—and capital gains are not taxed

    Centibillionaire Jeff Bezos moves to Florida, where his parents live—and capital gains are not taxed

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    After launching Amazon from a garage in Seattle in 1994, centibilllionaire Jeff Bezos is leaving the Pacific Northwest behind and setting sail for Florida. 

    In an Instagram post, the world’s third wealthiest person—with a net worth estimated at $160 billion—said he wanted to be closer to my parents after they recently moved back to Miami. 

    “My parents have always been my biggest supporters,” he posted to his Instagram account, adding that his spacefaring company Blue Origin is increasingly shifting operations to Cape Canaveral. 

    Florida also offers a financial benefit to the Amazon founder—it doesn’t charge capital gains tax which, for a man who’s sold some $30 billion in stock since 2002, according to Bloomberg, can be quite substantial

    Feeling at home

    Even though Bezos said he’s relocating to Miami, not a whole lot will change for the owner of the Washington Post newspaper. He won’t need to scout the real estate market for a new residence, since he already reportedly bought in August a $68 million Miami mansion on the small, man-made island of Indian Creek popularly known as “Billionaires Bunker”. In October, he added his next-door neighbor’s $79 million property as well.

    But Miami is not the only place where Bezos lives. In addition to his collection of luxury cars and private Gulfstream jets, Bezos owns multiple properties valued recently at a half billion dollars.

    Washington’s historic tax

    His move may have something to do with a Washington state supreme court decision in March of this year to uphold a 7% tax on capital gains that took effect in January 2022 despite a legal challenge. 

    The ruling is considered historic since legislators in Olympia took the opposite view of the Internal Revenue Service: they classified the tax as an excise tax rather than an income tax in order to circumvent the fact that Washington state does not have an income tax under state law. A majority of voters in Seattle are now in favor of a similar capital gains tax for the city itself.

    Unlike most people, entrepreneurs and other ultra-high net worth individuals typically do not pay taxes on their personal earnings, since their wealth stems from assets rather than salaries and bonuses. 

    Instead, the IRS collects every time one of these assets is liquidated, a far more meddlesome issue for the super-rich. For this reason, Florida is popular among the billionaire class since the state does not impose its own levies on such disposals—as it has no income tax in the broader sense, either.

    Even if Bezos’ tax dollars are set to move from the Pacific Northwest, the centibillionaire said he would still leave something behind as a token of his appreciation: “Seattle, you will always have a piece of my heart.” 

    Oh and the city still gets to keep Amazon.

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    Christiaan Hetzner

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