12 Tax Tips To Munch On

Why do we call money dough? Everyone knows that dough tends to stick to your fingers, while money tends to slip through them. Good tax tips, on the other hand, can be a lot like doughnuts. If you try one, it could make life a lot sweeter. TIM CESTNICK serves up a dozen tasty year-end tax-planning ideas that could keep investors' wallets a little fatter and a little happier in 2004

1. Carry losses back to 2000.

You may be aware that capital losses can be carried back up to three years to offset capital gains to the extent they cannot be used in the current year. This is very important, since 2003 represents your last chance to carry losses back to the year 2000, which is the last year that capital gains may have been taxed at higher rates.

That is, you may save more in tax by carrying your losses back to 2000 than by offsetting them against capital gains this year, or in years after 2000. So, think about triggering some losses before year-end if it means recovering taxes paid in the past.

2. Don't automatically

sell your losses.

It can make sense to sell an investment at a loss when: (1) you don't like the investment any more, or (2) you have capital gains this year or in the past three years to apply the loss against. If neither of these are true, consider holding onto the investment. Assuming you still like the future prospects of the investment, any future growth can offset that loss you've incurred, and you will gain nothing by selling at a loss today.

3. Avoid the superficial

loss rules.

If you sell an asset at a loss and then you, or someone affiliated with you, buys back that investment within 30 calendar days following the sale, or if you buy more shares of the stock during the 30-day period prior to the sale (a 61-day window in total), your loss will be denied. Avoid these rules if you hope to claim a capital loss this year. You won't be caught under the rules if you simply buy back a similar, but not the same, investment, or if you make the repurchase inside your registered plan (even within that 61-day window).

4. Give assets to a child.

If you have some losers in your portfolio, consider giving them to a child. This will accomplish a few things: (1) it will trigger a capital loss that you can claim; (2) it will reduce income taxes in the future, since you will have transferred any future growth to your child, and (3) it will reduce probate fees upon death, since you will no longer own the assets. You will, however, give up control over the assets.

5. Close out option

contracts with losses.

If you close out option contracts with accrued losses before year-end, you'll be able to use those losses to offset realized capital gains this year, or in the past three years (as far back as 2000).

Capital gains

6. Defer a sale until

the new year.

If you are going to face tax on the sale of an asset, consider waiting until the new year to make that sale. This will push the tax liability off until 2004, and the taxes on that capital gain will not be due until April 30, 2005, the due date for your 2004 tax return.

7. Trigger capital gains

in some cases.

It may make sense to voluntarily trigger some capital gains before year-end where there will be little or no tax owing on that capital gain. If you have no other income, for example, you can trigger up to $15,512 in capital gains in 2003 and not pay a cent in tax federally, and little or no tax provincially, thanks to the basic personal exemption in 2003. Selling for a profit and then reinvesting the proceeds will effectively bump up your adjusted cost base, saving tax later upon a final sale. A child's in-trust account is the perfect example where this can make sense.

8. Claim a capital gains reserve.

It's possible to sell an asset for a profit, and to pay tax on any capital gain over a period as long as five years. It's important to structure the sale so that you collect your sale proceeds over the number of years you hope to defer the tax (maximum five years). Consult a tax professional before year-end if you'd like to defer some tax on a sale this year.

9. Utilize the capital gains

exemption.

A $500,000 capital gains exemption still exists to shelter capital gains on the sale of qualified small-business corporation shares, or qualified farm property. It's possible to use up the exemption without giving up control over or use of the assets. Speak to a tax professional for more details.

Other ideas

10. Make interest deductible.

Have you got any non-deductible interest costs? If so, consider liquidating some of your investments (preferably ones that have dropped in value so that you don't trigger a tax hit) and use the proceeds to pay down the debt. Next, borrow to replace those investments.

The result? The amount of your overall debt will not change, but your interest costs on the new debt will now generally be deductible since you are borrowing to invest. Do this before year-end to ensure those interest costs are deductible for 2004.

11. Delay certain purchases

until January.

Some mutual funds are expected to make taxable distributions before year-end. If you're interested in purchasing one of these funds, consider waiting until the new year so that you don't face tax on that distribution, or choose a different fund that is not expected to make a distribution. After all, that distribution will represent income or capital gains earned at an earlier time, before you were an owner of the fund. While these taxable distributions will be added to your adjusted cost base, which will reduce your tax bill later upon a sale, you're still paying tax prematurely.

12. Donate securities to charity.

If you are planning to both (1) sell an investment at a profit before year-end and (2) donate to a charity in 2003, consider donating those securities you're thinking of selling. In this case, you'll be entitled to a donation receipt for the fair-market value on the date of the donation.

Further, the capital gain on the disposition of the security (which takes place when you donate it) will be subject to an inclusion rate of just 25 per cent, not the usual 50 per cent, which will cut your taxes in half. The tax relief from the donation, by the way, should more than offset the tax on any capital gain.

Tim Cestnick, FCA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.

tcestnick@aic.com

More homes cut the cord

For sharing and controlling everything from data files to music to appliances, wireless networks are all the rage

When Moshe Mizrachi holds business meetings in his house, he gathers his managing director, Tom Stopnicki, and son Marcus, director of operations, around a large-screen TV in a second-floor bedroom.

There, Mr. Mizrachi uses a laptop connected to the TV and to his home's wireless network to access files in his personal computer down in the basement office. Back in front of the TV, Mr. Mizrachi, the president of Wireless Workplace, a computer network consulting and systems integration firm in Richmond Hill, Ont., and his staff can view blueprints of offices for which they are designing networks and discuss where to run cables and install routers, switches and the like.

Using the very same system, Mr. Mizrachi's family can gather around the TV to view digital slideshows or listen through the television's Surround Sound speaker system to digital tunes downloaded from iTunes.com, Apple Computer Inc.'s new digital music Web site.

While wired networks proliferate in businesses, it is wireless networks, using the popular wireless fidelity (WiFi) standard, that are coming to dominate the home and small-business market.

Once a wireless router is connected to a computer, WiFi-enabled devices, such as personal computers, notebook computers and personal digital assistants, can gain access to and share software applications, data files and peripherals such as printers and high-speed Internet connections.

But networks are also bringing content stored on computer hard drives to home-entertainment systems in living rooms so families can share music, images and videos, access the Internet and play network and on-line games.

WiFi networks operate in the 2.4-gigahertz radio spectrum. Popular 802.11b WiFi networks transmit data at speeds of up to 11 megabits per second -- faster than cable or DSL connections, which means network bottlenecks are avoided as streaming audio or video files, commonly downloaded from the Internet, move across the network to home computers or home entertainment systems.

While 802.11b is the most common wireless network standard, 802.11g networks operating at 54 Mbps are now available. By comparison, Ethernet technology, a popular wired network protocol, operates at connection speeds of just 10 to 100 Mbps.

The worldwide market for wireless networks is projected to more than double to $3.2-billion (U.S.) by 2005, according to In-Stat/MDR, a Scottsdale, Ariz., research firm. In-Stat also expects that 95 per cent of notebook PCs shipped worldwide by 2005 will include WiFi connectivity. WiFi will also be embedded into most other mobile devices, such as PDAs and mobile phones.

Home-based computer networks are also being used to control lights, appliances and security systems, says Mike Keyes, a networking and computer security specialist who runs Keyes & Associates in Mississauga. Mr. Keyes had his house prewired for a network when it was built five years ago. The network router is connected to a PC in his home office and, from any of his five networked computers, Mr. Keyes can control his motion-detection system, lights and appliances. He can change the time lights come on or go off or which lights go on if his motion-detection security system is tripped. He can also control lights and appliances using a wireless remote handheld device.

Using the Internet and WiFi-enabled video cameras, the home network can be extended beyond the home, Mr. Keyes says. If a video camera capable of connecting to the Internet is hooked up to the network, the homeowner can monitor the camera on-line from anywhere.

The speed at which wireless networks operate has improved. And the price of network routers has dropped considerably, says Mike Wagner, director of marketing for Linksys, a division of Cisco Systems Inc. of Irvine, Calif. Two years ago, a wireless network router cost more than $300 (Canadian). Now, 802.11b wireless routers can be had for $99 to $190 from companies such as D-Link Corp. of Irvine, Calif., Netgear Inc., based in Santa Clara, Calif., Microsoft Corp. of Redmond, Wash., or Cupertino, Calif.-based Apple.

Now that WiFi networks are becoming more common, consumers want to take better advantage. They want to view photos and videos on a large screen in a common living space, not on a small screen in a study or home office, says Kevin Peesker, director of software and peripherals with Dell Canada. They also want to watch TV in that same space and TVs that double as computer monitors are a natural extension of the home network, he adds.

That's what prompted Dell Inc. of Round Rock, Tex., known for selling computers, to launch the 1700 LCD 17-inch flat-panel display TV and TV tuner. At $999, it can be used to watch TV or DVDs or play video games. Connected to a computer, it can be used to browse the Web or display software, images or video on a hard drive.

Consumers also often want concurrent access to TV programs, computer files and the Internet. Dell's Media Experience, software that ships standard on its LCD TV, uses a navigation system to let individuals access music and photos on the PC, surf the Internet and watch TV -- all at the same time -- turning the PC into the "digital nerve centre for the home," Mr. Peesker says.

As digital devices proliferate, the average home entertainment system is still designed for analog input, Mr. Wagner says. Devices such as the Linksys Wireless-B Media Adapter system bridge the analog and digital divides.

Mr. Keyes does have some concerns about wireless network security. But with full security in place, a wireless network can be as secure as a wired one. Take Mr. Mizrachi's system. Anyone wanting to connect a WiFi-enabled device to his network would need a password and user ID from Mr. Mizrachi, who can change network access information at any time. In addition, WiFi encryption can be used to protect data, and firewalls can block unauthorized file access from on-line hackers.

As more advances are made, it won't be long before consumers will have full control over the digital appliances in their home from anywhere they can gain access to the Net, even by mobile phone. Then they will be able to turn appliances on or off, adjust heat and air conditioning and get the coffee brewing before they get home.