Purtzki, Johansen + Associates


Tax Tips to help manage your stock portfolio

With all the ups and downs in the stock market, it is a Herculean task to manage your stocks.

Here are some tax tips to consider before you sell any more shares.

Watch the capital dividend account. When your corporation sells shares at a gain, 50% of the gain is not taxable. This non-taxable portion of the capital gain is tracked in the capital dividend account. You can take out these capital dividends tax-free. Assume that the capital dividend account has a balance of $50,000 and your corporation sells shares at a $50,000 loss; your CDA balance becomes zero, which means you lost the $50,000 tax-free dividend. So you must pay out the capital dividend account before triggering capital losses.

Understand the superficial loss rules. Suppose you sell a losing investment to realize capital losses. In that case, your losses will be denied if you or an affiliated party, such as your spouse, reacquires the same security in the period that starts 30 days before and ends 30 days after your sale. The denied loss will be added to the cost base of the shares.

Transfer capital losses to your spouse.  The superficial loss rules can help transfer capital losses to your spouse to offset capital gains. Suppose you plan to sell your investment at a loss but do not have capital gains to utilize these losses. So you sell the stocks and have your spouse purchase the same stock within 30 days of your disposition. According to the superficial loss rules, your loss will be denied, and the denied loss will bump up the cost base of the shares held by your spouse. Your spouse can then sell the investments after 30 days and will be able to offset the capital losses against capital gains.

Making gifts to adult children/grandchildren.

When the stock market is down, what an excellent opportunity to transfer some of your investments which have lost value to your children by selling that stock and gifting the cash to your kids. The transfer will trigger a capital loss which you can apply against any capital gains you enjoyed over the last 3 years.

If the stock market is up, while the gift will result in capital gains tax to you initially, your children will be deemed to acquire the investment at market value despite paying nothing for them. Beware not to sell for $1 or some other amount below market value price, or double taxation will occur. The transaction must be in the form of a gift.

With the investment now in your kids’ hands, any income or capital gains your children may have from the future investment of the funds are not subject to the CRA attribution rules, unlike in the case if you were to gift shares to your spouse.

Aside from the tax benefit, your children or grandchildren will be grateful for your financial assistance.

Gifting shares to charity.

When you donate publicly traded securities that have been appreciated to your favourite charity, there is no tax on the capital gain, and you also receive a donation tax credit.

Even better, if you donate corporately owned shares with unrealized gains, you get a credit of the full gain amount to your Capital Dividend Account, allowing you to file an election to extract that amount from your corporation tax-free.

If you donate shares that have declined in value, you can donate the shares or sell them in the market. The results are the same. If you donate the sales proceeds to your charity, you receive the donation tax credit and can utilise the capital loss.

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