Should You Claim Capital Cost Allowance on Your Rental Property?

It has been my experience that minimizing income taxes is typically the number one objective for many of my clients. Yet, some clients instruct me to not claim depreciation (the technically correct term for income tax purposes is capital cost allowance or “CCA”) on their rental property(ies), which results in a higher income tax liability.

I am further confounded when clients who have claimed CCA in prior years will not sell their rental property because they will owe income tax on both their capital gain and recaptured CCA (see detailed discussion below). Today I try and breakdown the reasoning for these counter-intuitive income tax positions.

A discussion as to whether or not one should claim CCA can become extremely complex when you consider inflation, purchasing power, discount values and present values. In an effort to not over complicate the issue, I will essentially ignore most of these factors; however, one must always be cognizant of them. For the purposes of today’s blog post, I will work under the assumption that you hold your rental property for 20 or so years and a dollar today is worth a heck of a lot more than a dollar 20 years from now.

When someone purchases a residential rental property, they can claim CCA at the rate of 4% on the building portion of the property (non-residential property may be entitled to a 6% claim). The land portion cannot be depreciated. In the year of purchase, only 50% of the CCA may be claimed.

For example: if you purchase a residential building for $800,000 in 2015 and you determine that 75% of the property related to the building and 25% related to the land, you will start claiming CCA on $600,000 ($800,000 purchase price x .75%). The allocation may be determined through negotiation with the seller and is reflected in the purchase and sale agreement, by appraisal or based on an insurance policy or other relevant information.

In the first year you can claim CCA to a maximum of $ 12,000 ($600,000 x .04% CCA rate x 50% rate allowed the first year).

In year two you can claim CCA of $23,520 ($600,000 -$12,000 CCA previously claimed x 4%). In all future years, the CCA claim is equal to the original cost of $600,000 less CCA claimed in all previous years x 4%. Technically, the remaining amount to be depreciated is called Undepreciated Capital Cost or “UCC”.

It should be noted that in general you are not allowed to create a loss for tax purposes with CCA. So continuing with the above example, if in year two you had net rental income of $15,000 before CCA, you cannot claim the $23,520 of CCA and create a loss of $8,520. You may only claim $15,000 of the CCA to bring your rental income down to nil. If you have more than one rental property, you can claim the maximum CCA even if it creates a loss on one property, if the net income of all rental properties does not become negative. For example, if in addition to the rental property above, you had a second property with net income of $9,000 after CCA on that property, you could claim the full $23,520 to create a loss of $8,520 on that property and net income of only $480 on both properties ($9,000-$8,520).

Thus, to the extent you can claim CCA; you have absolute income tax savings or a tax shield equal to the CCA you claim times your marginal income tax rate. Consequently, one wonders why anyone would not claim CCA if their marginal income tax rate was say at least 35% and they plan to hold the property long-term.

The reason some people do not claim CCA is a concept known as recapture. When you sell a building or rental property for proceeds equal to or greater than the original cost of the building, any CCA claimed since day one is “recaptured” and taxed as regular income. Thus, say you purchased the $800,000 building in the example 25 years ago and over those 25 years you claimed $350,000 in CCA. If you sell the land and building for $1,000,000, which is more than the original purchase price of $800,000, you would have to add $350,000 in recapture to your income and report a capital gain of $200,000 ($1,000,000-800,000).

At this point I could get into a technical discussion of the present value of the CCA tax savings over multiple years versus paying recapture 25 years later, however (1) I think it causes unnecessary confusion for purposes of this discussion and I don’t think most people even take this into account and (2) even though I am an accountant, I hated doing PV calculations in school, so if I tried to do them, I would probably get them wrong. But seriously, I have never had a client ask about the present value of their deprecation tax savings; they know intuitively a dollar saved today is typically worth far more than a dollar in tax paid in the future.

We can now discuss the second issue that confounds me in regard to CCA, that being some people are not willing to sell for the $1,000,000 we use in the example above because of the recapture they will owe.

Say Judy Smith purchased the property initially for $800,000 and she is in the 35% marginal tax bracket. If Judy sells the property, she will have to pay income tax on $350,000 of recapture and a $200,000 capital gain. The additional income tax that results from the sale for Judy will be approximately $220,000 (because she moved into the higher marginal rates).

Judy will thus net $780,000 ($1,000,000 proceeds less $220,000 tax), $20,000 less than her original cost. If Judy is like some people, she may not want to sell the property because she does not feel she made any money on the property. I have trouble understanding this position, since she would have benefited from the tax shield on $350,000 of CCA, which at a tax rate of 35% was worth approximately $125,000 and would have grown to between $200,000 (using a 4% return on the after-tax savings) and $260,000 (using a 6% return on the after-tax savings) and still broke even on her investment. If Judy did not want to sell because she feels the property still has large upside, or her tax rate would be lower in a future year and/or she cannot find another investment that can provide the same returns, that is another issue.

If Judy had purchased the property in 1990, she would need approximately $1,280,000 to purchase the property today (See bank of Canada inflation calculator).

In summary, I will typically recommend that a client claim CCA on their rental property. I also generaly tell them to not let the income tax due on recapture cloud a potential sale decision. In the end analysis, tax savings today are almost always worth more than taxes paid in the future, unless the purchase to sale period is very short.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Can You Deduct Your Own Labour and is Your RRSP Creditor Proofed?

Today you will read about a couple interesting topics. They are:

• Can you deduct the value of your own labour and materials?

• Is your RRSP creditor protected?

Deducting Your Own Labour

I am often asked whether you can deduct the value of your own labour and/or add your notional labour cost to the adjusted cost base of a property. Typically this question arises in the context of real estate (be it building a deck on a cottage or renovating the bathroom of a rental property) or in relation to services provided to a self-employed business (such as providing professional skills or bookkeeping, etc.).

My answer is always the same. No, you cannot deduct the value of your own labour. I have some do-it-yourselfers clients who have been flabbergasted when I tell them their own labour is not a deductible expense.

Last week, I watched a Video Tax News segment that referenced a June, 2015 Technical Interpretation 2015-0580791M4 by the CRA. The issue was whether a taxpayer could (1) deduct the value of his own labour in computing his income from a farming business; and (2) if they could include the value of their lumber in calculating the cost base of a farm structure that was built with the lumber.

The CRA said that the answer to both questions is no. They reference a couple sections of the Income Tax Act and Guide T4002. For more detail, hit the link above for the Technical Interpretation.

It should be noted that the above relates to income reported on your personal income tax return. If you are a shareholder in a corporation, you can pay yourself a wage for your time and deduct the expense, as long as you issue a T4 to yourself.

Are RRSPs Creditor Proof?

Recently, I was reviewing a proposal for a Personal Pension Plan (“PPP”) with one of my clients. During the conversation it was noted that one advantage of a PPP is that it offers creditor protection whereas a Registered Retirement Savings Plan (“RRSP”) may not. I was surprised by this, as I had understood, that RRSPs had become creditor proofed several years ago.

It was explained to me that RRSPs/RRIFs (Registered Retirement Income Fund) are creditor protected under Canada’s Bankruptcy and Insolvency Act in all provinces. However, in some provinces, such as Ontario, RRSPs are not protected from creditors in situations outside of the bankruptcy context, such as lawsuits, or possibly a claim by an estranged spouse.

For example, if you have a professional corporation or are self-employed in Ontario and your creditors sue you, it is my understanding that your RRSP would be at risk if you do not wish to declare bankruptcy and enter formal bankruptcy proceedings. You should confirm my understanding with your lawyer.

I also understand that the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, and Newfoundland and Labrador have specific legislation that protects your RRSP and RRIF from creditors. Again, as I am not a lawyer, you should confirm such if you live in those provinces.

If you live in a province in which there is no specific protection, you are at risk to creditors attacking your RRSP. Many legal commentators suggest the best way to protect yourself from creditors, is to purchase a segregated fund insurance contract (the management fees may be high and the investment options limited) or if your situation merits it and your advisor feels it appropriate, consider the benefits of setting-up a PPP.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?

Blended families add complexity to any estate plan. Last week, my special guest contributor, Katy Basi, addressed situations in which married spouses entered into a valid marriage contracts with each other, thus waiving all potential claims against each others estates. Today Katy discusses what happens when there is no such contract is in place.

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?
By Katy Basi

 

Upon the death of a spouse, the surviving spouse has the right to inherit from the deceased at least the amount that the surviving spouse would have received as a “property equalization payment” if the spouses had separated or divorced (assuming that no marriage contract is in place waiving this right). The calculation of this amount can become fairly complex, and there are a number of rules to be followed. In addition, only married spouses have the right to make this equalization claim – common law spouses are left out in the cold.

You may remember married spouses Kurt and Brigit from my blog post last Monday. In order to meet his contractual obligations under his separation agreement with his ex-wife Amber, Kurt has acquired a $500,000 term life insurance policy on his own life and has made Amber the beneficiary of the policy. Upon Kurt’s death, Amber will receive the $500,000 life insurance proceeds. As life insurance proceeds are “excluded property”, this amount would not be included in the calculation of any equalization claim made by Brigit against Kurt’s estate. Therefore, life insurance is a fairly safe way to provide for a beneficiary like Amber. Kurt should also, of course, ensure that the remainder of his estate is large enough to provide for Brigit and their children.

John and Olivia’s situation is far more complex. Olivia has minor children with John and a minor child from her first marriage. She is legally obligated to support all of these children.

Let’s assume that Olivia wants to leave her estate to her children in equal shares, in trust as they are minors. John does not inherit any part of Olivia’s estate, but he is named as the trustee of the funds held in trust for their children, and Olivia’s sister is named as the trustee of the funds held in trust for Olivia’s child from her first marriage. Olivia figures that John is self-supporting, and that he will benefit financially from having his support obligations for their children reduced by the funds he holds in trust for them under the provisions of her will.

In this case, John would have the right to make an equalization claim against Olivia’s estate. The calculation of the amount of the claim requires a fair amount of investigation and information. Depending on the facts, the amount of the claim can be as high as half of the value of the Olivia’s estate (in the unusual case where John owns no property and none of Olivia’s property is “excluded property” (e.g. certain gifts and inheritances)). Similarly, if John wants to leave his entire estate to his children, Olivia may have the right to make an equalization claim against John’s estate.

Equalization claims are costly, create uncertainty, and delay the administration of an estate. Therefore, in this scenario an estates solicitor would normally recommend that a client leave a carefully considered inheritance to their spouse. The amount of the inheritance should be calculated to ensure that the spouse would likely not receive more if they made an equalization claim against the estate. This amount is a constantly moving target, as asset values are always changing, so the estate plan should be reviewed on a regular basis.

In my practice, I have had a few clients who have wanted to cut out the spouse and leave their entire estate to their children. After explaining the potential for an equalization claim to be made by the disinherited spouse, a common client response is “oh, he/she would never do that….” I then point out that, while that may currently be the case:

1) the disinherited spouse may feel very differently once my client is deceased, or

2) the disinherited spouse’s new partner may encourage the claim to be made, or

3) if the disinherited spouse is mentally incapable of making financial decisions when my client dies, the attorney for property of the disinherited spouse may feel legally obligated to make the equalization claim, as part of the attorney’s obligation to act in the best interests of the disinherited spouse.

Finally, while it is common for spouses to see an estates lawyer together to make their estate plans (known in the law biz as a “joint retainer”), this arrangement does not always work well in blended family situations. In a joint estate planning retainer we have a “triangle of confidentiality” (the three points of the triangle being the two spouses and the lawyer). While no one outside of the triangle has the right to hear about any information or decisions, there are no secrets within the triangle. If one spouse wants the lawyer to keep something secret from the other spouse, the lawyer cannot comply with that request. Therefore, it is fairly common in blended family scenarios that each spouse retains their own estates lawyer to advise them and to draft their will and powers of attorney. While two lawyers are clearly more expensive than one, the higher level of confidentiality and privacy and the benefits of having a lawyer completely “on your side” are often worth the extra fees.

If you enjoyed this post by Katy, just type her name in the "Search This Blog" box on the right side under the Hire The Blunt Bean Counter badge and you will find numerous excellent blog posts she has contributed on wills and estates.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

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.

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract

I have received numerous requests to write about estate planning for blended families. I thus asked Katy Basi, my resident wills and estate planning contributor, to write about this topic. Katy has graciously provided a two part post on estate planning for blended families. Today she writes about situations where there are marriage contracts in place and next week she discusses the issues that arise when you do not have a marriage contract. So without further ado, here is Katy!

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract 

By Katy Basi

 

In any list of situations that create complexity in an estate plan, “blended families” are near the top. Given the number of potential issues involved, this post will address situations in which the currently married spouses have entered into a valid marriage contract with each other waiving all potential claims against each other's estates. My blog post next Monday will address cases in which no such contract is in place.

Note: All discussion is based on Ontario law – the relevant law in other provinces may be different.

Even in the simplest blended family situation, where there are no children from past marriages or common law relationships, the provisions of any contracts or court decrees relating to the prior relationships must be taken into account in creating the estate plan for the current spouses. Let’s take the example of married spouses Kurt and Brigit. This marriage is the first for Brigit, but Kurt was previously married to and divorced from Amber, and has ongoing support obligations to her due to Amber’s inability to work.

There are no children from Kurt’s first marriage. Kurt and Brigit want to leave their entire estates to each other, failing which to their children. However, Kurt has forgotten about the provision of his separation agreement with Amber requiring him to maintain a $500,000 term life insurance policy for her benefit. He used to have such a policy in place, but inadvertently let it lapse a number of years ago.

Kurt’s estates lawyer advises him that unless he reinstates the policy, Amber will have a $500,000 claim against his estate. This claim would greatly reduce his current family’s inheritance and lead to additional complexity, delay and cost in the administration of his estate. Kurt therefore puts an insurance policy in place for Amber’s benefit as soon as possible.

Now let’s take the example of John and Olivia, both of whom have children from their first marriages. John’s children from his first marriage are self-supporting adults who have finished their post-secondary education. Olivia’s child from her first marriage is still a minor, and she is required by her separation agreement to pay child support. This support obligation lasts until the child is 18 years of age, or, if the child is still in school, until the child attains age 25. John and Olivia also have two minor children together.

As John and Olivia have a marriage contract, each is free to create an estate plan without worrying about a claim by the other against their estate (it is also assumed that each of John and Olivia is self-supporting, and therefore would not be able to make a claim for spousal support against the estate of the other).

Olivia is therefore free to split her estate among her minor children from both marriages, if she so desires. She is under a legal obligation to provide for her child from her first marriage, as that child is a dependent of hers and could otherwise make a “dependent’s relief” claim against her estate through a litigation guardian.

John is under no such obligation with respect to his adult children, as they are not financially dependent on him. However, John may wish to leave part of his estate to his adult children, and he is free to do so as long as his estate plan provides for his minor children from his current marriage.

My next blog post will address these scenarios where there is no marriage contract. If we think of these testators as having a number of estate planning balls to juggle, failing to have a marriage contract adds a flaming torch into the mix!

Blunt Bean Counter Note: As per this post on recent changes in legislation in relation to the taxation of trusts, the new legislation can impact on estate planning for blended families. Thus, you may wish to confirm with your estate lawyer, that your will does not need to be amended in light of these tax changes.

If you enjoyed this post by Katy, you may wish to check out some of her prior guest posts such as: Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets. She has also posted on the family cottage and wrote a very well received post titled, An Estate Fairy Tale.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com. 

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

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. 

Tax Loss Selling - 2015 Version

For the fifth year in a row, I am posting a blog on tax loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).

For full disclosure, there is very little that is new in this post from last year's version, other than my discussion of identical shares

I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2015 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets are down this year, you may have some unrealized capital losses you can realize to use against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2015.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics

All capital gain and capital loss transactions for 2015 will have to be reported on Schedule 3 of your 2015 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses

If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation

I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2014 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2012, 2013 and 2014 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2012, 2013 and 2014.

3. For each of 2012-2014, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2013 or 2014, review whether you carried back those losses to 2012 or 2013 on form T1A of your tax return. If you carried back a loss to either 2012 or 2013, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2012 to 2014, you can potentially generate an income tax refund by carrying back a net capital loss from 2015 to any or all of 2012, 2013 or 2014.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses

For discussion purposes, let’s assume the following:

· 2015: realized capital loss of $30,000

· 2014: taxable capital gain of $15,000

· 2013: taxable capital gain of $5,000

· 2012: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2015 against the $7,000 and $5,000 taxable capital gains in 2012 and 2013, respectively, and apply the remaining $3,000 against your 2014 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2014 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2015 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2014. Alternatively, if you have capital gains in 2015, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares

Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses

Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2015 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2015 and 2016, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $9,200 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2017 for $18,000 you will have a capital gain of  $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $27,200 ($18,000 +$9,200 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares

Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income

Every year, I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains

In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date

It is my understanding that the settlement date for stocks in 2015 will be Wednesday December 24th. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2015 by December 24, 2015.

Summary

As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while sitting on Santa’s lap in the third week of December.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.