The newspapers are filled with the typical year-end tax planning and investment strategies. It seems the number one strategy in almost all of these articles is to trigger any unrealized capital losses in your portfolio to use them against any capital gains you realized in 2010.
Well, what if you don’t have capital gains or you have capital losses galore from some prior investment mishap? Or, how about the case where you have gains and your spouse has losses, or vice versa? I will examine a couple strategies for 2011 to take advantage of these lonely unutilized losses.
The first strategy you may wish to consider is the purchase of a Flow-Through Tax Shelter (“Flow-Through”). Please see my September blog entitled Are You a Flow-Through Junkie for a discussion of Flow-Through’s. As noted in the Flow-Through blog, flow-through’s generate a capital gain upon disposition.
So following the $10,000 example in the September blog, you purchase a Flow-Through tax shelter in 2011 for $10,000 which results in income tax savings of approximately $4,600 in filing your 2011 income tax return and leaves you out of pocket $5,400 ($10,000-4,600). It should be noted that the adjusted cost base of your flow-through is now nil.
Typically the Flow-Through funds roll into a mutual fund 24 months following their purchase. If you sell the mutual fund 24 months later for the same $10,000 you purchased the fund for, and apply $10,000 of your unused capital losses, you would end up ahead by $4,600 on the investment ($10,000 cost -$4,600 in tax savings - $10,000 proceeds of sale). You also have downside protection. In the example above, where you utilize your capital losses, the value of the investment could fall to $5,400 and you would still break even.
Of course you and your investment advisor must evaluate the investment risk and consider that commodity prices may drop, or the market for junior resource stocks may deteriorate.
Transferring Capital Losses to a Spouse
Many couples trade independently and even if they trade together, one spouse may have realized capital gains while the other spouse has unrealized capital losses. Because the Income Tax Act does not permit transferring losses directly to a spouse, the typical strategy of selling stocks with unrealized losses to net against realized capital gains is not applicable. However, you are not out of luck.
The Income Tax Act prevents taxpayers from triggering a loss by selling a property to an affiliated person such as a spouse thorough the superficial loss rules. However, using proper tax planning, spouses can utilize the superficial loss rules of the Income Tax Act to allow one spouse to offset their gains against the losses of the other spouse.
Say June bought Glowing Gold Mines for $20,000 and the shares are now worth only $5,000 while her husband Ward is a sharp trader and has numerous gains. In order to transfer June’s capital loss to Ward, she sells her stock on the open market. Ward then immediately buys Glowing Gold Mines on the open market for $5,000. June’s losses are denied under the superficial loss rules because Ward, an affiliated person, has purchased the same security within 30 days of June selling.
But in an ironic twist of income tax fate, June’s loss of $15,000 is denied, but it is added to the cost base of Ward’s shares. His Glowing Gold Mine shares now have a cost base of $20,000 and if he sells them for $5,000 at least 31 days after purchasing them, Ward will have a $15,000 loss to claim against his capital gains even though he only purchased the shares for $5,000.
I think we can all agree, police radar traps are a necessary evil in school areas and on neighbourhood streets and certain other areas where speed could result in a fatality. However, it is another story when radar is set up as an apparent money grab in what we perceive to be non-risk areas. Of course, you know where I am going with this.
On the weekend I was driving on the 401 Highway in Toronto which has a posted speed limit of 100, but of course everyone drives between 110 and 120 km per hour. I was driving to an appointment around
Black Creek Drive , an area that I am not very familiar with.
The cut-off to Black Creek appeared to be a continuation of Highway 401. I was not going much faster than the speed of traffic and, in the middle lane, was not aware or even considering that the limit could have dropped. However, to my consternation, as I was flagged down, I learned that the speed limit for this cut-off was 80 km per hour.
The police officer was very fair to me under the circumstances, and I have no issue with him, my issue is the placement of the radar in this area. I told the police officer that having radar in this area is “like shooting fish in a barrel” and he did not disagree. This is one of those “it is what it is” issues, however, that does not mean I cannot publicly vent – one of the benefits of this blog.
The blogs posted on The Blunt Bean Counter provide
information of a general nature. These posts should not be considered specific advice;
as each reader's personal financial situation is unique and fact specific.
Please contact a professional advisor prior to implementing or acting upon any
of the information contained in one of the blogs. Please note the blog post is time sensitive and subject to
changes in legislation or law.