1. Carry losses back to 2000.
You may be aware that capital losses can be carried back up to three years to offset capital gains to the extent they cannot be used in the current year. This is very important, since 2003 represents your last chance to carry losses back to the year 2000, which is the last year that capital gains may have been taxed at higher rates.
That is, you may save more in tax by carrying your losses back to 2000 than by offsetting them against capital gains this year, or in years after 2000. So, think about triggering some losses before year-end if it means recovering taxes paid in the past.
2. Don't automatically
sell your losses.
It can make sense to sell an investment at a loss when: (1) you don't like the investment any more, or (2) you have capital gains this year or in the past three years to apply the loss against. If neither of these are true, consider holding onto the investment. Assuming you still like the future prospects of the investment, any future growth can offset that loss you've incurred, and you will gain nothing by selling at a loss today.
3. Avoid the superficial
If you sell an asset at a loss and then you, or someone affiliated with you, buys back that investment within 30 calendar days following the sale, or if you buy more shares of the stock during the 30-day period prior to the sale (a 61-day window in total), your loss will be denied. Avoid these rules if you hope to claim a capital loss this year. You won't be caught under the rules if you simply buy back a similar, but not the same, investment, or if you make the repurchase inside your registered plan (even within that 61-day window).
4. Give assets to a child.
If you have some losers in your portfolio, consider giving them to a child. This will accomplish a few things: (1) it will trigger a capital loss that you can claim; (2) it will reduce income taxes in the future, since you will have transferred any future growth to your child, and (3) it will reduce probate fees upon death, since you will no longer own the assets. You will, however, give up control over the assets.
5. Close out option
contracts with losses.
If you close out option contracts with accrued losses before year-end, you'll be able to use those losses to offset realized capital gains this year, or in the past three years (as far back as 2000).
6. Defer a sale until
the new year.
If you are going to face tax on the sale of an asset, consider waiting until the new year to make that sale. This will push the tax liability off until 2004, and the taxes on that capital gain will not be due until April 30, 2005, the due date for your 2004 tax return.
7. Trigger capital gains
in some cases.
It may make sense to voluntarily trigger some capital gains before year-end where there will be little or no tax owing on that capital gain. If you have no other income, for example, you can trigger up to $15,512 in capital gains in 2003 and not pay a cent in tax federally, and little or no tax provincially, thanks to the basic personal exemption in 2003. Selling for a profit and then reinvesting the proceeds will effectively bump up your adjusted cost base, saving tax later upon a final sale. A child's in-trust account is the perfect example where this can make sense.
8. Claim a capital gains reserve.
It's possible to sell an asset for a profit, and to pay tax on any capital gain over a period as long as five years. It's important to structure the sale so that you collect your sale proceeds over the number of years you hope to defer the tax (maximum five years). Consult a tax professional before year-end if you'd like to defer some tax on a sale this year.
9. Utilize the capital gains
A $500,000 capital gains exemption still exists to shelter capital gains on the sale of qualified small-business corporation shares, or qualified farm property. It's possible to use up the exemption without giving up control over or use of the assets. Speak to a tax professional for more details.
10. Make interest deductible.
Have you got any non-deductible interest costs? If so, consider liquidating some of your investments (preferably ones that have dropped in value so that you don't trigger a tax hit) and use the proceeds to pay down the debt. Next, borrow to replace those investments.
The result? The amount of your overall debt will not change, but your interest costs on the new debt will now generally be deductible since you are borrowing to invest. Do this before year-end to ensure those interest costs are deductible for 2004.
11. Delay certain purchases
Some mutual funds are expected to make taxable distributions before year-end. If you're interested in purchasing one of these funds, consider waiting until the new year so that you don't face tax on that distribution, or choose a different fund that is not expected to make a distribution. After all, that distribution will represent income or capital gains earned at an earlier time, before you were an owner of the fund. While these taxable distributions will be added to your adjusted cost base, which will reduce your tax bill later upon a sale, you're still paying tax prematurely.
12. Donate securities to charity.
If you are planning to both (1) sell an investment at a profit before year-end and (2) donate to a charity in 2003, consider donating those securities you're thinking of selling. In this case, you'll be entitled to a donation receipt for the fair-market value on the date of the donation.
Further, the capital gain on the disposition of the security (which takes place when you donate it) will be subject to an inclusion rate of just 25 per cent, not the usual 50 per cent, which will cut your taxes in half. The tax relief from the donation, by the way, should more than offset the tax on any capital gain.
Tim Cestnick, FCA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.
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