- Year end is coming. And for active traders, that may mean having to take a few extra steps in order to get ready for tax season. Dugan Batten is a High Net Worth Planner for TD Wealth. And he's here with a list of things to think about. Dugan, let's run through that list. I think first one, most important, is to determine whether or not you are in the business of trading or not. So what does that mean? And why is that important?
- It is an important one. And it's based on CRA's perception of you as an investor. So if you're an investor and you sell an investment for a gain, that's a capital gain, and 50% of it's taxable. If CRA determines that you're actually in the business of trading-- and this is going to be the case, or may be the case if you are buying and selling stock frequently or you're not holding on to investments for very long-- then they may treat you as-- treat that gain as a business gain, which is the 100% taxable.
Now, it's not all so bad because if you have losses and you're in the business of trading, those losses can be offset 100% on any type of income, whereas with a capital loss, you can only deduct it 50% and can only offset capital gains.
- OK, let's talk about tax-loss selling. What do we need to be careful of?
- So tax loss-selling is a tax strategy that a lot of investors are undertaking this time of year. And it's not because you can only do it this time of year. You can do it throughout the year. It's because people-- or investors know how many capital gains-- or how much their capital gains are that they've accumulated throughout the year. And so they're trying to do some tax planning to offset those gains. And so you would look at your portfolio and see if there's any investments that you can dispose of at a loss to offset those gains.
Now, there's three things you need to be cognizant of. The first is the settlement date and the trade date. Those are two different dates, and you want them to occur prior to year end. The second is you can only do the strategy in taxable accounts, so your non-registered investment accounts. It doesn't work in your RSP. And it doesn't work in your tax-free savings account. And then the third is you don't want to stumble upon the superficial loss rules.
OK, so let's talk about the superficial loss rule. Remind us, how does that work?
- So say I disposed of an investment for a loss and then I reacquired that same investment within 30 days. That's when the superficial loss rules kick in. And they would deny my loss and add my cost base by my original investment. And so this applies not only if I re-acquire the investment, but it also applies to my spouse, and if I have a corporation that I control, that as well.
- OK. And what about the possibility of transferring a capital loss to your spouse?
- Yeah, this is a strategy where you're actually trying to fit into the superficial loss rules. And I'll give you an example so that it's a little more simple to understand. So say I have this large capital gain that I would like to offset, only that I don't have any investments that have an unrealized loss that I can offset it-- fortunately, for me. But my wife does.
And so she has this investment that is underwater. And so the strategy is she would sell it to me for the fair value price, so whatever the stock price is today. And then, on her tax return, when she records that sale, she'll actually elect out of the automatic transfer cost that we would normally get, as we're spouses. And so I would take that investment. And then I'd wait 30 days, because I don't want to be subject to the superficial loss rules again. I'd wait 30 days, and dispose of it, and offset my gains with that loss.
- Dugan, you're also watching President-elect Biden's plans on the US estate tax exemptions. Why?
- Yeah, the US estate tax, for those of you who aren't familiar with it, are similar to our probate fees here, in that they are based on the assets we hold at death. And it's based on the fair value. And so the US estate taxes-- that tax is up to 40%, so it's quite a hefty hit. And so in order to be subject to it, you need to meet two criteria, the first being you own US sided assets-- so US investments, US real estate-- in excess of $60,000 US. And so it's not hard to hit.
The second criteria is an exemption limit. So if you're above this limit or this threshold, you're subject to the tax. If you're below it, you're not. And what it does is it looks at your worldwide estate-- so all your US assets, your Canadian assets, European, whatever it is. And so when Trump was in, he doubled that threshold to $11 and 1/2 million, as it is today. And what I'm watching Biden-- is if that limit is going to be reduced, because when Obama was in power, it was $5 million US.
And then there's also talk that Biden might even reduce it further back to what it was in 2009, and that was $3 and 1/2 million US. And so I'm watching this closely because this could apply to a lot more people now.
- Dugan, thanks very much for your time.
- You're welcome.
- That's Dugan Batten, High Net Worth Planner with TD Wealth.