Sometimes investors have to take the bad with the good. The good? Sometimes you make money. The bad? Sometimes you don't.
My next two articles will talk about my top dozen year-end strategies for dealing with capital gains and losses. Today, let's start with tips on capital gains.
Defer dispositions until the new year.
If you're thinking of selling some securities at a profit soon, consider delaying that sale until the new year. This way, you'll defer the capital gain until 2005, which won't cost you any tax until you file your 2005 tax return in 2006. Selling the security in 2004 will cause you to pay tax a year sooner.
Trigger capital gains before year-end.
Consider triggering capital gains before year-end by selling certain securities if you have little or no other income. This will cost you little or no tax. Then, you can reinvest those proceeds, which will provide you with a higher adjusted cost base (ACB) than before. This higher ACB will save you tax later when you sell the new investment.
Create capital gains to offset losses.
If you realized capital losses this year, or have unused losses from the past, consider creating capital gains to offset the losses. Options include purchasing flow-through shares, which have a nil ACB. Selling the shares, perhaps in a couple of years, will create a capital gain, allowing use of the losses. Consider selling life insurance company shares acquired on a demutualization. They also have a nil ACB.
Claim a capital gains reserve.
Thinking of selling an asset for a profit? The capital gain can be spread over a period as long as five years. The key is to collect your sale proceeds over that same number of years. There are a number of ways to accomplish this in a manner that is palatable to the seller. Speak to a tax pro for more.
Use the lifetime capital gains exemption.
It's possible to shelter up to $500,000 of capital gains from tax on the sale of qualified small business corporation shares, or qualified farm property. It's also possible to use this exemption without having to give up ownership or control over these assets. This is called "crystallizing" the exemption. Speak to a tax pro about it.
Donate securities to charity.
If you intend to give money to charity, and are thinking of selling investments that have grown in value, consider donating the securities to charity instead of cash. In this case, the capital gain triggered on the disposition (the donation) of the securities is cut in half. You'll be better off than donating cash.
Tim Cestnick, FCA, CPA, CFP, TEP, is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, Tax and Estate Planning, at AIC Ltd.
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