Tax Gain/Loss Selling 2021 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling, except this year, I changed the title to tax gain/loss selling (to include some planning for stocks with capital gains). I am posting on this topic again because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

Hopefully, based on the strong stock markets of both 2020 and 2021, you do not have many unrealized capital losses. However, the last half of 2021 has been very sector oriented and you may have stocks that were hit on the sector rotation. In fact, in a November 22nd Globe and Mail article by Tim Shufelt, he noted that 17% of S&P/TSX composite stocks were down by at least 10% year to date. That was before the large market drop on Black Friday.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options by next week and if you are a DIY investor set aside some time this weekend or next to review your 2021 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.

I am going to exclude the detailed step by step capital gain/loss methodology I usually include in this post. If you wish the detail, just refer to last year's post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2020, 2019 and 2018). 

You have three options in respect of capital losses realized in 2021:

1. You can use your 2021 capital losses to offset your 2021 realized capital gains

2. You can carry back your 2021 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about 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—raising the cost to repurchase far in excess of their tax savings.

Thus, you should first and foremost consider selling your "dog stocks" that you or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares

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

Superficial Losses

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

Tax-Gain Selling 

While typically most people are looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains for the reasons discussed below.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

2022 Budget

While I don’t comment on rumours and conjecture, there are many tax commentators who feel there is a good chance the capital gains inclusion rate will increase from 50% to a higher rate in a future budget. If you are in that camp, you may wish to lock in capital gains at the lower rate. As no-one knows if the capital gains rate will change, you need to review this with your advisor as the sale will be taxable immediately, even if you buy-back the same security (there are no superficial gain rules).

Settlement Date

It is important any 2021 tax planning trade be made by the settlement date, which my understanding is  the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2021 settlement dates for Canada and the U.S.

Corporations - Passive Income Rules

If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary

As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

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.

Some People are so Poor, all they have is Money

The quote “Some people are so poor, all they have is money” has been attributed to Patrick Meagher (a Canadian journalist and author), Bob Marley (the famous reggae singer) and others. I cannot confirm who first uttered these insightful words, however, for purposes of today’s blog post, it is the words that matter, not who said it and the attribution. 

When I first read this quote, it reminded me of two blog posts I wrote in 2012, “Are Money and Success the Same Thing” and “Are Money and Success the Same Thing – Part 2”.

In Part 2, I looked at money and success and how they impacted five key aspects of all our lives: family, career, health, spiritualism, and impact on society. My conclusion was that money and success are not one and the same but do impact one another. Meaning in certain circumstances, money can influence success, and success can determine how much money you have. These 5 key aspects can also be applied to understand why “some people are so poor” even when they have money. 

During my personal and professional life, I have met many people who have made substantial fortunes and are also rich in many non-monetary ways. But unfortunately, I have also met many people who in my opinion have only money and yet are very poor in other aspects of their lives. Today I will delve into how this can be (for some readers, entitled children of wealthy individuals often come to mind when considering this quote, however, for today's post, I am only considering those who worked to create the wealth, not their children).

How can you have Money and be Poor?

In searching the internet for comments on this quote, some commentators assumed being poor meant being spiritually poor. My interpretation is that they think such a person is spiritually poor if they are lacking in religious, human and societal values. Others focused on the concept money does not buy happiness and that there are things money cannot buy such as values and relationships. Finally, some people took for granted many people want money and/or success. Yet, they felt it was important people chasing the almighty dollar also attempted to find happiness in day to day living as chasing wealth without chasing happiness would leave you empty and only with money.

Monetarily Successful People

While some successful people may sacrifice spiritualism, in my experience, spiritualism is typically not present or strong to begin with in those who sacrifice that aspect of their life. 

There are people who in the name of money that have impacted society negatively, either environmentally or in other nefarious ways. But those are typically a small minority. Societal values are one area where successful people can sometimes just use their money to improve society, by just signing their name to a cheque. This can be done by funding projects for those less fortunate or giving generously to charitable causes even if they have limited personal involvement or are just donating for image purposes. 

Based on the above, it is therefore my perception that those who are “poor because all they have is money” typically sacrificed family and health to achieve their monetary wealth.

Sacrificing Family and Health

Health

The health topic is unfortunately often clear-cut. Many people work so hard to make money that they do some or all of the following: don’t exercise, don’t eat properly, drink to much or take time to deal with their mental health, which often leads to poor health or even death.

Family

For me, family is the largest casualty of those who are so poor, all they have is money. These people are just so busy chasing money and/or their dreams that they have no time left for their family. I personally do not think most people have any intention to “sacrifice” their family in their chase for financial success. It just incrementally occurs as they excuse themselves to meet a client, work all weekend to meet a deadline, go to business dinners or travel to that extra convention to drum up more business. The energy spent trying to earn every last dollar and workaholic behaviour leads to missing a child’s birthday party, play/recital/teacher parent meeting and Valentine’s dinner with your spouse and the trip you promised your family after you closed that “big deal”. Suddenly, you are not there as a parent, spouse or friend and you compensate by buying gifts and material things, rather than giving your time. 

This is the cost I have seen over the years. Marriages dissolved and children estranged and spouses and/or children with personal, mental or health issues. In the end, the parent becomes solely a bank with little to no actual familial involvement. That is my interpretation of “Some people are so poor, all they have is money.”

Life Balance

At the risk of being simplistic (I am sure some psychologists have 100 page papers on this topic) and/or “preachy,” in my experience, the difference between those who had money and were not poor versus those that were poor was life balance. They did not need to make that last dollar by sacrificing their family time for every deal. Yes, they did occasionally or more than occasionally work too hard or too late and yes, they did sacrifice family time where the business or job demanded it, but overall, they ensured they had their date night with their spouse, attended as many children functions as possible, showed their children charitable actions both financially and by personal actions and just made family time a priority.

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.

Gifting or Loaning Money to your Children to buy a Home

Last week, CIBC Economics released a report titled “Gifting for a down payment -perspective” by its Deputy Chief Economist, Benjamin Tal. The report provides a wide range of statistical data in relation to the value and type of gifts parents are providing to their children to purchase houses.

Some of the key statistics in the CIBC report include the following:

1. Over the last year, CIBC estimates gifting totaled just over $10 billion for family member house purchases, which accounts for 10% of total down payments in the market as a whole for that period

2. Almost 30% of first-time home buyers received assistance from family members 

3. The average gift is now approximately $82,000 

4. Where the gift is the primary source of the down-payment, the gifts average $104,000 for first-time home buyers no less than $157,000 for mover uppers 

5. CIBC reports that only 5.5% of the gifting parents used debt to finance the gifts (that percentage rises substantially for gifts for homes in Vancouver and Toronto) and therefore it appears parents are using their savings to make these gifts

Whether a gift is $50,000 or $200,000, the amounts are substantial and many parents never planned or conceived of gifting such large amounts of their savings. Whether parents are encroaching upon their retirement savings for these gifts is an interesting topic for another day.

However, what I want to discuss today is; whether some parents should be making loans in lieu of gifts, to protect their family money under the various provincial family law acts (in the case of a marital breakdown), where the child will use the gift to buy a home.

Before I go any further, I want to note that I am not a family lawyer. This blog post is general in nature and should not in any manner be considered as legal advice. This blog is being posted to caution parents who are considering making a housing gift to seek family law advice before doing such. I say this because not only is the family law complicated in regard to monies used to purchase a matrimonial home, but the question of whether the monies are better made as a loan versus a gift is a legal minefield of its own. I humbly suggest the legal costs will be worth the piece of mind and/or the potential financial savings to the family.

Gifts vs Loans

Where there is a marital breakdown, one of the key issues in respect of money given to a child to purchase a home is whether the money was a gift or loan. That characterization can be the difference between a family keeping or losing thousands of dollars. I will assume for purposes of this discussion, there is no pre-marital agreement dealing with this issue, which is often a suggested option by lawyers, but very rarely acted upon.

Gifts

Family lawyers (in Ontario) have told me, that in general, gifts or inheritances received during a marriage that are kept separate from the family property will typically be excluded property and not be considered family property subject to division (I am not aware if all the provinces have the same general rule, you will have to check with a family lawyer in your province). Thus, children are often told by their lawyer or their parent’s lawyer to keep a gift or inheritance invested only in their name and not to co-mingle these funds in a joint spousal bank/investment account or pay joint expenses. I have also been told however, that if a gift is used to buy a matrimonial home, it will no longer be excluded property. Again, confirm this all with a family lawyer.

Loans

A loan would typically be secured by a promissory note, which lawyers have told me in general should be deducted as a liability as net family property. Sounds simple, but as per this article "Promissory Notes Between Parents and Their Married Children" by Nathalie Boutet, Managing Partner, Boutet Family Law & Mediation, properly documenting and executing a promissory note is far from just writing a note out on a piece of paper. The importance of legal advice is further strengthened when you read in Ms. Boutet’s article that a debt can be discounted even if a promissory note is valid and has not been forgiven, if there is a low probability that the parents will collect it. Ms. Boutet notes the discount can be as high as 90%-100% making the promissory note effectively a gift.

Legal Interpretation of a Gift vs Loan

But what constitutes a gift vs a loan? This is far beyond the scope of this post, but the case of Barber v. Magee, 2015 ONSC 8054 (Ont. S.C.J.) provides some clarity of the documentation required for a family transfer to be categorized as a loan. The characterization of whether funds advanced are a gift or loan are detailed in this law firm’s summary, "Inter Family Gifts vs. Inter Family Loans". As I understand this as a layperson, in this case the husband received $157,000 or so from his father which was used to purchase the matrimonial home and pay for other costs. The husband argued the $157k was a loan he still had to repay, and it would still form a liability and be deducted from his net family property. 

The wife argued the funds were a gift and since the funds were used to purchase the matrimonial home, the husband had to record the house as an asset to be split as part of the family property. The courts held the funds were a gift.

It was my intention in writing this post to:

1. Reflect the complexity of family law and the jurisprudence in respect of whether funds given to a child are a loan or gift 

2. Urge you to consult a family lawyer before making a gift or loan to your child/ren to help in buying a house, since as the CIBC report reflects, 30% (likely rising even higher) intend or will be asked to assist our children in buying a starter or mover upper.

I hope I accomplished these objectives.

Bloggers Note: On my @bluntbeancountr Twitter account, a tax expert tweeted that the last couple times their clients wanted to reflect monies from the parents as loans for house down payments, the banks instead requested a written parental declaration that the funds transferred were a gift (this is related to the payment tests for CMHC and mortgaging) and they were unable to use a promissory note loan backed by a 2nd mortgage. You should discuss this upfront with your real estate and family lawyer and bank to see if this is problematic in your case.

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.