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Save tax on investment income when filing

Last weekend I was on my own with the kids. My wife, Carolyn, took a couple days off and visited her sisters out west.

"Don't worry," I told her. "I can manage the household just fine." I felt some comfort knowing that we have a Martha Stewart book sitting on the shelf. So, I decided to browse the pages of Martha's book.

I didn't agree with Martha's approach on a few things. Consider this tip: To easily remove burnt-on food from your skillet, add a drop of dish soap and enough water to cover the bottom of the pan and bring to a boil on the stovetop. My method: Eat at Swiss Chalet every night and avoid cooking.

Here's another one she might have recommended: Save taxes on your investment income by creating a bouquet of dried flowers and sending them to Revenue Canada. My method: Consider the following six strategies to reduce the tax on your investment income when filing your tax return.

1. Calculate your true ACB.

The higher your adjusted cost base (ACB), the lower the taxable capital gain will be on any investment sales you made last year. Don't forget to add to your total ACB any reinvested mutual fund distributions or dividends under a dividend reinvestment plan. This will increase your ACB and reduce taxes. Other things can affect your ACB too, but these are the most common.

2. Remember 1994 elections.

Canadians were allowed to make a special election in 1994 to use up the $100,000 lifetime capital gains exemption. In effect, that election bumped up the ACB of your investments on which the election was made. In the case of mutual funds, an exempt capital gains balance (ECGB) was created which can be used, until the year 2004, to offset capital gains distributions or gains on the sale of those funds. If you sold any investments in 2001, check to see if you had made an election on those investments in 1994. If so, the higher ACB or ECGB may save you tax when filing your return.

3. Claim losses in the right year.

If you triggered any capital losses in 2001, you'll have to claim those losses against any capital gains you might have realized in 2001. To the extent you haven't got sufficient gains in 2001, you can carry those losses back to 1998, 1999 or 2000 to offset capital gains in any of those years, or carry the losses forward indefinitely. You'll save more tax by carrying those losses back to offset gains realized before Feb. 28, 2000, when capital gains were taxed at higher rates. You can choose whichever of the past three years you'd like.

4. Claim losses on defunct


What happens if you own an investment that ceases trading because the company is bankrupt or insolvent? Can you claim a capital loss? Quite possibly. Subsection 50(1) of Canadian tax law will allow you make an election that will deem you to have sold that security for nil proceeds if the company meets certain criteria. If you claim a capital loss and sell the security later, you'll be taxed on a capital gain at that later time. Speak to a tax pro for more information.

5. Deduct all carrying charges.

You may be entitled to claim interest costs or investment counsel fees related to your investments. Interest costs are deductible when you've incurred those costs to, as one objective, earn "income from property" (which includes interest, dividends, rents or royalties).

Don't forget about your brokerage or margin account interest, or interest charged on a Canada Savings Bond payroll purchase plan. Even where an investment has gone sour and is no longer held by you, a portion of the interest on the money borrowed to buy that investment may still be deductible.

As for investment counsel fees, those costs are deductible when they were paid for advice on the purchase or sale of securities or for the administration or management of securities. Fees related to registered accounts are not deductible. As for commissions, these are not deductible, but will be added to your ACB on a purchase and will reduce your capital gain or increase your loss on a sale.

6. Transfer dividends

to your spouse.

It may be possible to save tax by transferring Canadian dividends from the lower-income spouse who may not be able to use the dividend tax credit (because of a low income) to the higher income spouse who can use the credit and who will be able to claim a higher spousal credit in the process. A calculation will have to be done to see if this will be beneficial for you.
Tim Cestnick, CA, CFP, TEP is author of Winning the Tax Game 2001 and Winning the Estate Planning Game. He is managing director, Tax Smart Services, at AIC Group of Funds.

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