With just a couple of weeks to go before yearend, you have no doubt been inundated with e-mails, newsletters and webinars on key tax planning steps you need to take with your clients by Dec. 31.
With a lot of great information out there and so much to wade through, let’s a take few minutes to review the top two ways in which I consider a financial advisor can best assist his or her clients when it comes to year end tax planning; namely, tax-loss selling and tax-gain donating.
Tax-loss selling involves selling investments with accrued losses at yearend to offset capital gains realized elsewhere in a client’s portfolio. Any capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset capital gains in other years. In order for the client’s loss to be immediately available for 2013 (or one of the prior three years), the settlement must take place in 2013, which means the trade date must be no later than Dec. 24 in order for it to settle by Dec. 31.
Of course, we always need to be wary of the “superficial loss” rules that apply when you sell property for a loss and buy it back within 30 days before or after the sale date. The rules apply if property is repurchased within 30 days and is still held on the 30th day by the individual or an “affiliated person,” including a spouse (or partner), a corporation controlled by the individual or spouse, or a trust of which the individual or his or her spouse is a majority beneficiary (such as an RRSP or tax-free savings account [TFSA]). Under the rules, the capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means the benefit of the capital loss can only be obtained when the repurchased security is sold.
Similarly, be sure to keep in mind the restrictions against transferring an investment with an accrued loss to an RRSP or TFSA to realize the loss without actually disposing of the investment, as such a loss is specifically denied under our tax rules. There are also harsh penalties for “swapping” an investment to a registered account from a non-registered account for cash or other consideration. To avoid these problems, consider selling the investment with the accrued loss and contributing the cash from the sale into the RRSP or TFSA. The RRSP or TFSA can then buy back the investment after the 30-day superficial loss period.
Given the appreciation we’ve experienced in the stock markets in 2013, it’s likely your clients have accrued capital gains on various investments in their portfolios. Gifting publicly-traded securities, including mutual funds, with accrued capital gains to a registered charity or foundation not only entitles your client to a tax receipt for the fair market value of the security being donated, it eliminates the capital gains taxes as well.
And, on this theme, new for 2013 is the federal first-time donor’s supercredit (FDSC), which was announced in the federal budget this past March. Your client can claim this credit if neither the client nor his or her spouse or partner has claimed the charitable donation tax credit in any of the five preceding taxation years, from 2008 to 2012.
The FDSC, which can be claimed once from the 2013 to 2017 taxation years, provides an additional 25% tax credit on total monetary donations up to $1,000 that are made after March 20, 2013. When added to the regular federal charitable donations tax credit, tax savings would be 40% for total monetary donations up to $200, and 54% for total monetary donations between $200 and $1,000. Provincial charitable donations credits are also available to increase the tax savings. Since only monetary donations are eligible for the FDSC, in-kind donations of securities will not qualify for this extra 25% credit but will still save the capital gains tax.
Still hungry for more yearend tax tips? Be sure to read my complete 2013 Year End Tax Tips report as well as watch the replay of Investment Executive’s Yearend Tax Planning 2013 webinar, sponsored by Renaissance Investments.