The start of 2016 has not been kind to investors. I met one this week whose portfolio is down 15 per cent year to date. He didn’t seem panicked about it. “Tim, you know what they say: When life hands you lemons, you make lemonade,” he said. His wife then chimed in: “Henry, the problem with lemonade is the sugar. You don’t need the sugar with your diabetes.”
“Henry, here’s a thought,” I said. “When life hands you lemons, don’t just make lemonade. Plant the seeds to start an orchard, turning those lemons into something really profitable.”
If the equity markets have handed you lemons so far this year, consider turning those lemons into something profitable with a few strategies:
1. Boost your retirement savings.
It’s the time of year to focus on contributing to your registered retirement savings plan or tax-free savings account. If you happen to have some investments that have dropped in value recently, consider selling them and using the cash to make a contribution to your RRSP or TFSA. This works best if there will be no, or a low, tax bill on the sale – which may very well be the case given market declines. If you’re so inclined, you might then borrow to replace your non-registered investments. You’ll be entitled to a deduction for your interest costs in this case (which is not the case if you borrow to contribute to your RRSP or TFSA). Be careful not to simply transfer investments with accrued losses directly to your RRSP or TFSA because those capital losses will be denied.
2. Create interest deductions.
If you’re like many Canadians, you might have debt to your name. And chances are good that you’re not allowed a deduction for the interest you’re paying. If you have investments that have declined in value, consider selling them to free up some cash. Use that cash to pay down your mortgage, credit cards, or any non-deductible debt. You can then reborrow to replace the investments you’ve sold. In the end, the total amount of your debt will remain the same, but you’ll be entitled to an interest deduction on the new debt since you’ll be borrowing for investment purposes. As a general rule, you can deduct interest when you borrow for the purpose of earning “income from property” (which includes interest, dividends, rents or royalties).
3. Save for a child’s education.
Consider turning the losers in your portfolio into more dollars by selling some of those securities and contributing the cash to a registered education savings plan. For every dollar you contribute to an RESP, the government will kick in an extra 20 per cent – a Canada Education Savings Grant (CESG) – on any contributions up to $2,500 each year for an eligible child. And depending on your family’s net income, an additional 10 or 20 per cent on the first $500 you contribute could be granted to you. Kids who are Canadian residents and are beneficiaries of an RESP can receive CESGs until the end of the calendar year they turn 17. Special rules apply if your child is between the ages of 15 and 17.
4. Begin your estate transfer.
There’s nothing like dying broke to eliminate any tax or probate fees at the time of your death. Okay, so there are risks in trying to time things so that you spend your last dollar on your last day. A better approach is to consider making some gifts to your heirs during your lifetime, ensuring of course that you keep enough for yourself. This will reduce taxes and probate fees on death. There’s no better time than when markets have declined to consider these gifts. When assets have appreciated in value and you make a gift to the kids (a gift of the investment itself or cash from the sale of the investment) you could face tax on a capital gain. But when the investment has declined in value, you won’t face tax and you’ll have a capital loss that you can use to offset capital gains in the future, or carry back to recover taxes paid on capital gains in the last three years.
5. Beware of the superficial loss rules.
If you do sell an investment at a loss to take advantage of these ideas, remember that your capital loss could be denied if you choose to reinvest in the same securities in the period that is 30 days after, or prior to, your sale – a 61-day period in total. Investing in different, but similar, investments can make sense if you’re inclined to buy back what you sell.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotia Wealth Management, and founder of WaterStreet Family Offices.Report Typo/Error
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