Here at Investor Clinic, I've noticed a trend. Every time I write an article about taxes, my in-box is filled with questions about … taxes.
As much as I enjoy trolling through the Canada Revenue Agency website for answers to your tax queries, this week I thought I'd bring in an expert who knows this stuff cold. Thanks to John Waters, vice-president and head of tax, estate and trust expertise at BMO Nesbitt Burns, for answering your e-mails.
1) I read your article on using capital losses to offset capital gains. How does this work when transferring investments from a non-registered account to a tax-free savings account? For example, if I were to transfer $5,000 worth of stock to my TFSA that had gained do I have to declare a capital gain? On the other hand if I were to transfer $5,000 worth of stock to my TFSA that had decreased in value do I declare a loss, and can I use the loss to offset capital gains?
Individuals are allowed to make an in-kind contribution of investments from a non-registered account to their TFSA, provided that the property is a qualified investment and sufficient TFSA contribution room is available. As is the case with a registered retirement savings plan, the individual will be considered to have disposed of the property for its fair market value at the time of the contribution. If the fair market value exceeds the cost of the property, the individual will have to report the capital gain in his or her income tax return. However, if the cost exceeds the fair market value, the resulting capital loss cannot be claimed.
2) I sold the family cottage two years ago and would like to use some of this year's capital losses to get back some of the tax on that year's capital gain. Is this allowed?
Yes. Net capital losses realized in the current year (from an investment portfolio, for example) can be carried back to offset net capital gains realized in any of the three previous taxation years. Net capital losses can also be carried forward indefinitely. However, in preparing a claim for a carryback of a capital loss, it will be important to determine the potential tax impact or benefit, which will depend on the individual's tax situation of the prior year.
3) I understand that when the adjusted cost base of an investment falls to zero, the investor must report any further return of capital payments (ROC) as capital gains on his or her tax return. My question is: Does the brokerage or mutual fund company also begin classifying these payments as capital gains at this point, or do they continue to classify them as ROC, and leave it up to the investor to report them as capital gains?
A distribution from a mutual fund trust will often include a portion of ROC. Although ROC is not generally taxable immediately, it reduces the tax-adjusted cost base of the units held. In general, the unitholder is responsible for determining the correct tax-adjusted cost base of the mutual fund units at all times. As such, it will be incumbent upon all investors to keep track of the historical ROC adjustments to determine if the cumulative cost base adjustments result in a negative amount; generally this excess (and the resultant capital gain) will not be separately disclosed by the mutual fund companies or brokerage firms. The CRA publishes a helpful guide RC4169, Tax Treatment of Mutual Funds for Individuals, for further assistance in understanding the personal tax implications of investing in mutual funds.
4) I received the November statement of my RRSP account with BMO InvestorLine and was surprised to find that non-resident tax at 19 per cent was withheld from dividends paid on my shares of Spanish-based Telefonica SA-sponsored American depositary receipts. My questions are: 1) Whether sponsored ADRs on the New York Stock Exchange are covered under the tax treaty between the United States and Canada; 2) If yes, is there anything that I could do with BMO InvestorLine for some remedy; and 3) If not, what is the withholding tax rate on dividends?
The Canada-U.S. tax treaty provides an exemption from the U.S. withholding tax on U.S.-source dividends and interest held within a Canadian RRSP or registered retirement income fund. However, other foreign security distributions are not subject to this Canada-U.S. treaty exemption, regardless of whether the investment is in U.S.-denominated ADRs or in ordinary securities. The withholding tax on other foreign securities is withheld at source at the full rate of the issuing country. There is no facility in the Canadian securities industry for the beneficial owners of other (that is, non-U.S.) foreign securities to receive the benefit of any tax treaty between Canada and the issuing country. The only recovery option is to apply directly to the issuing government tax authority for any potential refund due to the provisions of the relevant tax treaty, if any.