Tax tips for get­ting a head start on 2018

The Globe and Mail (Alberta Edition) - - GLOBE INVESTOR - Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an au­thor and founder of WaterStreet Fam­ily Of­fices. TIM CESTNICK tim@cestnick.ca

From hold­ing off on an in­vest­ment un­til next year, to do­nat­ing se­cu­ri­ties to char­ity, these strate­gies are worth con­sid­er­ing

The eq­uity mar­kets are a strange thing. Every time one per­son sells, an­other one buys, and they both think they’re smart. That’s just the way it is. If the truth be known, re­gard­less of whether you’re mak­ing good in­vest­ment de­ci­sions or bad, there are some things you should con­sider as we ap­proach yearend.

Wait un­til 2018 to pur­chase cer­tain in­vest­ments

Are you look­ing to in­vest in an in­ter­est-bear­ing se­cu­rity, such as a guar­an­teed in­vest­ment cer­tifi­cate (GIC), that has a ma­tu­rity of one year or longer? If so, con­sider wait­ing un­til 2018 be­fore mak­ing the in­vest­ment. This way, you won’t have to pay tax on any ac­crued in­ter­est un­til 2019 – the year of the first an­niver­sary of the in­vest­ment. Also, con­sider wait­ing un­til early in 2018 to pur­chase any mu­tual funds that are ex­pected to make tax­able dis­tri­bu­tions be­fore the end of 2017, oth­er­wise, you’ll face taxes in 2017 on those dis­tri­bu­tions.

Trig­ger ac­crued losses be­fore year-end

Did you re­port cap­i­tal gains in one of the three prior years (2016, 2015, or 2014)? If so, or if you’ve re­al­ized cap­i­tal gains in 2017, con­sider sell­ing your losers be­fore year-end to ap­ply those cap­i­tal losses against the gains from this year (which must be done first), or against gains from one of the three prior years. Ex­cess cap­i­tal losses can be car­ried for­ward for use in­def­i­nitely. See my ar­ti­cle from Sept. 28 (tgam.ca/2xRt7yh) for more ideas re­lated to your cap­i­tal losses.

Trig­ger cap­i­tal gains be­fore year-end

Why would you ever want to re­al­ize a cap­i­tal gain be­fore year-end? It could make sense if you can sell an in­vest­ment with­out cre­at­ing a tax li­a­bil­ity. Per­haps you have cap­i­tal losses to use up, or the cap­i­tal gain will be taxed in the hands of some­one who will pay lit­tle or no tax (in-trust ac­counts for chil­dren, for ex­am­ple). You might also choose to sell and trig­ger a cap­i­tal gain if you ex­pect your mar­ginal tax rate to be much lower in 2017 than next year, and you’re think­ing of sell­ing any­way. If you sell the in­vest­ment, then rein­vest the pro­ceeds – even in the same se­cu­rity – you’ll cre­ate a new, higher ad­justed cost base, which will save tax later.

Give in­vest­ments to a child

If you’ve got an in­vest­ment that has dropped in value, con­sider trans­fer­ring it to a child be­fore year end. This will trig­ger a cap­i­tal loss that you can use to off­set cap­i­tal gains, and will pass the tax li­a­bil­ity on any fu­ture growth in the in­vest­ment to your child. You’ll also min­i­mize pro­bate fees on those in­vest­ments at the time of your death.

Do­nate se­cu­ri­ties to char­ity

Do­nat­ing by year-end will pro­vide you with a do­na­tion credit, and tax sav­ings, for 2017. If you’re con­sid­er­ing dis­pos­ing of cer­tain pub­licly traded se­cu­ri­ties any­way, think about do­nat­ing those se­cu­ri­ties to char­ity.

Any re­sult­ing cap­i­tal gain on the do­nated se­cu­ri­ties will be elim­i­nated, while in re­turn you’ll re­ceive a tax credit for the do­na­tion.

Claim a cap­i­tal gains re­serve

If you’re think­ing of sell­ing an as­set by year-end at a profit, con­sider struc­tur­ing the sale so that you col­lect your sale pro­ceeds over more than one year. You’re able to spread the cap­i­tal gains tax li­a­bil­ity over a pe­riod of up to five years if you take pay­ment over a pe­riod of up to five years. Con­sult a tax pro to struc­ture this prop­erly.

In­vest in off­shore funds wisely

In the past cou­ple of years, the tax­man has tar­geted in­vestors who have in­vested in funds that are lo­cated out­side of Canada. If one of your main rea­sons for mak­ing these in­vest­ments is to avoid tax, our tax law will cause you to pay tax an­nu­ally on a deemed in­ter­est amount. The re­al­ity is that most Cana­di­ans who make these types of in­vest­ments are not do­ing so for tax rea­sons; they are typ­i­cally choos­ing in­vest­ments they sim­ply can’t find else­where.

Set your­self up for suc­cess in 2018 by be­ing pre­pared for a con­ver­sa­tion with the tax­man if you’re in­vest­ing in these funds. How? By cre­at­ing an In­vest­ment Pol­icy State­ment that de­tails your in­vest­ment ob­jec­tives and clar­i­fies that tax re­duc­tion or de­fer­ral is not a main rea­son for mak­ing the in­vest­ment; have a dis­cus­sion with your in­vest­ment ad­viser about this is­sue and speak about the fact that tax is not one of your main rea­sons for mak­ing the in­vest­ment (and doc­u­ment this dis­cus­sion by keep­ing min­utes on file); and choose a Cana­dian money man­ager if you can find one com­pa­ra­ble to the off­shore fund you’re in. Fi­nally, if the cost amount of your off­shore prop­erty is less than $100,000 in ag­gre­gate, you won’t have to re­port these as­sets on Form T1135, which will likely take you off the tax­man’s radar.

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