My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, March 6, 2017

Legacy Stocks - To Sell or Not Sell? That is the Question?

Many people, typically seniors/baby boomers have owned stocks for decades, either through direct purchase or an inheritance of some kind (stocks transferred from a deceased spouse pursuant to their will generally have an adjusted cost base equal to what the deceased spouse originally paid for the shares; shares inherited from a parent or grandparent will generally have a cost base equal to the fair market value on the day of inheritance). These stocks are commonly known as Legacy Stocks; more often than not, they will include shares of Bell Canada, the Canadian bank(s) and/or insurance
companies.

Several weeks ago, Rob Carrick, The Globe and Mail’s excellent personal finance columnist  mentioned to me that several of his readers had asked him about selling their legacy stocks (or as more typically is the case, not selling their legacy stocks). I told him I thought the issue would make a good blog topic and asked him if he was okay with me using his idea to write a post. He gave me his blessing, so today I am writing about the issues and considerations for those of you holding legacy stocks and similar type securities.

The Common Quandary


The issue with selling legacy stocks is that they:

1. Typically have huge unrealized capital gains and thus the sale of these stocks creates a large tax bill

2. The realization of the capital gain can result in a clawback of Old Age Security ("OAS"), which seniors are loathe to ever repay

I know some readers, especially my millennial readers are thinking to themselves “Is Mark really going to write about minimizing the large capital gains of baby boomers that have already benefited from the huge increases in real estate? Cry me a river that they owe some tax.” The answer is yes, since a tax issue is a tax issue and this blog, although meant for everyone, is targeted to high-net-worth individuals and owners of private corporations.

There Is No One Size Fits All Answer


If you have a legacy stock(s) you are considering selling, there is not a standard “one size fits all” answer. There are however, various investment and income tax considerations. I discuss these issues and considerations below.

Capital Gains Rates


The marginal tax rate for capital gains in Ontario for income in the $45-$75k range is approximately 15%. This rate jumps to 22% or so between $90-$140k in taxable income and hits 26.8% once your taxable income exceeds $220,000.

These capital gains rates are the lowest tax rates you get in Canada. So from my perspective, the taxes you would pay from the sale of a legacy stock should not be the determinant in deciding to sell. The key factor (subject to the discussion below) should always be what the best investment decision is. Watching a stock drop 15%, to save 20% in capital gains tax, makes absolutely no sense, when viewed in isolation.

Some tax pundits think the upcoming (no date yet announced) Federal budget may change the taxable inclusion amount of a capital gain from 1/2 to 2/3 or even 3/4. If you are one of those people, now may be a time that the capital gains rate becomes a more significant factor in making your decision to sell a legacy stock (some people are selling and buying back). However, this is only a rumour and if there is no change in legislation, you would accelerate your tax payable.

Old Age Security Clawback


As noted above, the capital gains tax tail should not wag the tax dog. However, there is one issue that complicates the matter for seniors and that is the Old Age Security Clawback.

As evidenced by many accountants’ scars and wounds, never cause even the sweetest senior to have an OAS claw back, because all hell breaks loose :). I am only half-joking; seniors really resent having their OAS clawed back. I assume it is because they feel they have an entitlement to this money and the government does not have the right to claim all or some portion back (even though, they did not directly fund this program).

Seniors must pay back all or a portion of their OAS as well as any net federal supplements if their annual income exceeds a certain amount. For 2017, if your net income before adjustments is greater than $74,789 ($73,756 for 2016) then you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received. The maximum repayment is hit around $119,000.

So if you have a capital gain on a legacy stock of $90,000 ($45k taxable) and you are right at the $74,789 OAS limit before the capital gain, the tax cost of the capital gain would be around $15,000 or 17% of the $90,000 gain. However, when you add the OAS clawback that would be applicable, the combined tax and OAS clawback could approach $22,000 or 25% or so. That is why you cannot look at the gain in isolation.

If you do not have an investment reason to sell your stock, you may want to consider selling the stock over a few years to minimize the tax and OAS clawback, assuming you wish to keep the stock each year.

Holding Company


A “sexier” alternative, especially for seniors is to transfer your stocks to a holding company. You should be able to do this on a tax-free basis under Section 85 of the Income Tax Act. The benefit to doing this is any dividends earned and the eventual capital gain are taxed in the holding company and thus, do not affect your OAS clawback. In addition, if you have any potential U.S. estate tax exposure (see this prior blog post on estate tax), the U.S. stocks in your holding company will not be subject to U.S. estate tax (if there is U.S. estate tax -President Trump intends to eliminate the tax). So while you do not save any actual income tax, you can save your OAS from being clawed back and possibly gain some U.S. estate protection.

The downside to this strategy is the cost to transfer the stocks (legal and accounting) and ongoing accounting costs, which can be high for a holding company and thus, potentially a significant part of the OAS clawback savings is now paid to your accountant instead of the government, so you have to weigh the savings versus the costs.

Capital Losses


If you plan on triggering capital gains on legacy stocks, you should review if you have any capital losses you can apply against these gains. The CRA notes your capital loss carryforward balance on your notice of assessment and if you have a My CRA account, you can get this information online. It should be noted, the application of the losses only reduce the capital gains tax, not the OAS clawback.

Charitable Donation


Where you donate public securities to a registered charity, the capital gains inclusion rate is set to zero. Thus, there would be no capital gain to report on the donation of a legacy stock (have your accountant run the numbers, but this should minimize or eliminate the clawback) and you receive a donation credit. This is reported on Form T1170 . This strategy is effective if you make large donations every year or were planning to make a substantial donation and helps the charity since you have more funds to donate than with an after-tax donation.

The decision to sell a legacy stock is not a simple one. The overriding decision should still be an investment decision; however, where you are indifferent to selling, you need to consider the various issues and options I have noted above. Before undertaking any legacy stock selling, you should consult your accountant and investment advisor to account for all your personal circumstances.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

7 comments:

  1. What we do is donate "legacy" stock to CanadaHelps (CH) for the purchase of a gift card. Then we make our charitable donations off the gift card. Let's say we normally donate to 15 charities a year. Instead of dealing with 15 charitable tax receipts we now only have one. CH maintains a record of all your past donations. CH maintains a searchable list of all registered charities. You don't have to worry about if the charity is registered or who to make the cheque out to or where to send it. At the other end the charity gets the money transferred into their bank account (if they set that up). They get the donor information but don't have to issue a tax receipt. We then repurchase the stock within our TFSAs ($9.99) so as not to unbalance our portfolio. That way there is no further capital gain to worry about. Our contact at CH is Nicole Danesi.

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    1. Hi Bill

      I always applaud anyone who donates to charity. Donating stock is a very tax effective way to be altruistic and allows more funds to make there way to the charity.

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  2. In another of your posts, your general recommendation is to not hold investment income in a holding company. I believe you state/suggest the cost of compliance/operation and potentially higher tax rates makes a holding company costlier than holding investments personally.

    Isn't this even more so now that the holding company will likely have to pay in excess of 50% tax whereas an individual (unless making over $200k in retirement) likely will pay a lower tax rate. The difference should more than offset any potential OAS clawback.

    Some of the income in the holding company could be distributed out to family members, which might lower its tax burden. I appreciate any comment on this as a holding company was one option presented to my by my investment/tax professional.

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    Replies
    1. Hi Anon:

      I dont comment on other professionals advice. You also are not taking into account the refundable tax on hand in an investment company that would lower the tax rate when dividends are paid. You need to have your advisor undertake an analysis for you.

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    2. Thanks. I didn't intend for you to comment on another professional;a poor choice of wording by me. I'll ask for a review as it may make sense.

      Having problem replying as anything but anon.

      Regards.
      J.

      Delete
    3. NP, you need your accountant to work the numbers and explain the attribution issues you can have with income splitting and whether you can avoid them

      Delete
  3. Useful information as we are coming to a point of needing to assist aging parents with money management. Thanks!

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