Thursday, 14 April 2011

Five Last Minute Tax Reducers for Investors

2010 is long gone and the April 30th income tax filing deadline looms close, so investors might ask themselves what last minute tax actions they might be able to take to reduce taxes or get a larger refund on this year's return. Here are some suggestions.

1) Swap between spouses to offset unrealized capital gains of one against losses of the other
This operation could save taxes of the current year or of the past three years for couples with investments in non-registered taxable accounts. A person with unrealized capital gains makes a swap with his/her spouse who has unrealized capital losses. The somewhat tricky procedure requires several steps to effect the gain-loss transfer. Two good step-by-step descriptions can be found in financial planner and author Alexandra Macqueen's Canada:Transfer Capital Losses and in accountant Tim Cestnick's Globe and Mail article Share with your spouse and erase a cash drain.

2) Carryback 2010 (or older) realized capital losses to offset previously reported realized capital gains and recover past taxes paid
If you have capital losses from 2010, they can be used to offset gains in the three previous tax years (2007, 2008 and 2009). That is allowed after 2010 losses have been applied to any 2010 gains and there is still a loss. The form to use is the Canada Revenue Agency's T1A Request for Loss Carryback, which is included/filed with the 2010 return.

3) Apply net realized capital losses of prior years to reduce realized 2010 capital gains or past capital gains
The same idea of offsetting capital losses in one year against gains in another year can work as well by bringing forward past losses to the present. You will see on your 2009 Notice of Assessment from the CRA the total of past capital losses you have claimed. The claim is made on line 253 of your income tax return.

If you messed up and missed doing this before, there is still some chance to do the offsetting of gains and losses further back. First, note that there is a time limit on changes to past returns. The CRA's How to change your return page says that you may only change returns of up to ten years ago, i.e. 2001 or later. If you neglected to report losses in 2002 (remember that year of big market declines?), you can do so now but cannot claim against any gains in 2000 (perhaps tech boom year profits?). The ten year limitation is a good reason to report capital losses promptly each year, even if there are no present gains to offset. Losses can be carried forward indefinitely against future gains. It is too easy to forget or lose documents needed to make a future claim, and the process is more cumbersome.

4) Make a declaration of deemed capital loss for companies gone bust
When a company like Nortel goes bankrupt or becomes insolvent and its shares become worthless with no hope of recovery, it is possible even without selling the shares to make a declaration to the CRA claiming a total capital loss under subsection 50(1) of the Income Tax Act. The claim is made through a letter to CRA (no form is available) stating: name of the company, number and class of shares, date shares were bought, adjusted cost base, proceeds of disposition (usually zero), any expenses for disposition, and amount of the loss. Accountant Robert Smith's Tax Deduction for Shares You Can't Sell and Million Dollar Journey's Claiming Capital Loss from a De-listed Stock provide more background.

Two important points are:
  • The declaration must be made in the return for the tax year the bankruptcy happens e.g. for a 2010 bankruptcy, it must be made this year.
  • De-listing of the stock is not enough - some companies may carry on doing business after de-listing. However, de-listing is a strong sign to pay attention (check the TSX Reviews and Suspensions list on TMX Money) if the drop to zero in your account hasn't caught your attention! The Office of the Superintendent of Bankruptcy Canada has a database that can be searched to provide a key detail required in the claim letter - the date of insolvency, bankruptcy or wind-up.
5) File a return and pay taxes owing on time
The easiest way for an investor to save money is to avoid paying a penalty for late filing, paying interest on any taxes owing or interest on the penalty! The CRA Interest and penalties page tells us exactly how much interest and penalties CRA will apply. Should it be necessary to report imprecise or incomplete data, it is still better to file a return, and estimate the amount owed. Even when that means over-paying taxes, there may be a silver lining since CRA's current rate of interest paid back to individuals on overpayments is a rather attractive, compared to that of bank accounts and term deposits, 3%.

Disclaimer: this post is my opinion only and should not be construed as investment or tax advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor or an accountant.


Million Dollar Journey said...

Great post, and thanks for the mention!

YourMoney said...

These are great pointers. Very innovative ways of protecting your hard earned money. Don’t let tax season stress you out. There is always an answer, and then there are some additional creative ways to help you invest your money safely and smartly.