The selling of capital assets is a permanent transaction, one that can lock in gains and losses and leave taxpayers with either positive or negative tax results. Structuring transfers of assets to family members can be just as precarious, without financial guidance from learned and experienced specialists, that is.
Here are four discussion points to consider for year-end planning purposes if an actual or deemed disposition is imminent in a non-registered financial account or with non-financial assets, not including depreciable assets:
Selling is permanent. A capital loss occurs when certain types of assets are disposed of, for less than the total of their adjusted cost base (ACB) and any related outlays and expenses. Capital losses incurred will generally offset capital gains earned in the year, but not other income. While you can buy the securities back, you will have to wait until at least 31 days after the sale. Otherwise the losses are considered superficial and not claimable.
Deemed dispositions. A taxable event can also happen in certain circumstances when there is a transfer of the assets, but not a sale. Examples of “deemed dispositions” include permanent departure from Canada, when shares held are converted, redeemed or cancelled, when options to acquire or dispose of property expire, when a debt is settled or cancelled or when an asset is transferred to an individual or trust. Generally, the proceeds of disposition will be the Fair Market Value (FMV) of the asset at the time of disposition. This is important, as, for some assets, an appraisal is necessary to justify that valuation for tax purposes.
Structure Family Transfers Carefully. When assets are transferred by way of gift to your spouse or common-law partner, the capital gains or losses will be deferred until the asset is actually disposed of, resulting in a tax-free rollover at the time of transfer. This rule can be avoided when a spouse pays FMV for the property or when a spousal loan for that amount is drawn up. But again, there are special rules, to prevent investors from crystallizing losses without actually disposing of the property. Such losses will eventually be realized when the property is finally disposed of to a third party. Professional help is a must in these cases.
Don’t flip losers to RRSPs or charities. When you transfer securities to either your RRSP or to a registered charity, that transfer will be taxed as a disposition at fair market value. Unfortunately, if the value of the securities has gone down, losses on transfers to your RRSP are deemed to be nil and therefore cannot be claimed. So transfer securities with accrued gains instead. That gain must be reported on your tax return before the security loses its tax attributes inside the registered accounts.
To fund your charities, be aware that while you can claim a loss when you donate shares, there are valuable income tax benefits to transferring qualifying shares with accrued gains. Not only do you get the donation credit for the FMV, but your capital gains are also exempt from tax. The plays: Either transfer shares that have an accrued gain, or sell the losers first and then contribute the proceeds to charity. In both cases, you will receive a donation receipt that will reduce your taxes payable.
However, if you wish to claim the Super Donation Tax Credit, available until 2017, transfers won’t count: You will need to donate up to a maximum of $1000 in cash; something you can do by selling your losers.
Cutting your losses, in short, is all about what you get to keep over time in a volatile investment climate, by averaging down the taxes on winners with the claims you can make on the losers.