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tax matters

My wife had an uncle who was frugal until the day he passed away. Getting "stuff" for free was always something he looked forward to. He used to buy fish and chips at a local restaurant and would ask them to wrap it in that day's newspaper just so he wouldn't have to buy the paper separately.

I would agree that free is good, most of the time, and a life that is free of tax is even better. So, I've got some good news for you: Although disposing of assets is often a taxable event, there are a number of situations where you can dispose of assets on a tax-free basis. Consider the following ideas:

Selling your principal residence.

My bet is that you're already aware that you can generally sell a property that is your principal residence free of tax. Our tax law will allow each family unit (consisting of you, your spouse or common law partner, and any unmarried children under age 18) to designate one property each year as their principal residence. Although it's often overlooked, you should file Form T2091 to designate which property you'll claim as your principal residence if you own more than one property. This form should be filed in the year that you sell a property.

Making gifts to others

Gifts of cash to anyone can be made on a tax-free basis. Further, there is no limit as to how much you can give away each year. Now, if you're a U.S. citizen, resident or green card holder, there's a limit of $14,000 (U.S.) that you can give to any one person in 2013 and still avoid a gift tax problem south of the border. There are no such limits in Canada. You should be aware that giving away assets other than cash to anyone but your spouse can give rise to a tax hit if those assets have appreciated in value. Giving assets to your spouse results in no tax since that transfer is deemed to take place at your cost amount.

Switching your mutual funds

If you happen to own corporate class mutual funds (as opposed to mutual fund trust units), then you will be able to switch from one fund (or share class) to another in the same mutual fund corporation without triggering a taxable event. You should also be aware that any particular mutual fund may have more than one type of share or unit to choose from, and switching between them will not generally cause a tax hit. For example, if you switch from the deferred sales charge (DSC) units of a mutual fund to the front-end load units of the same fund, you are not changing the underlying investment that you hold but, rather, are changing the commission structure, and so this won't generally be a taxable event.

Retaining beneficial ownership

In order for a taxable event to take place, there must be a change in beneficial ownership. So, there may be cases where the legal title to an asset has changed, but beneficial ownership has not. This may happen, for example, if you change your non-registered investment account to be a joint account with an adult child for estate planning purposes, but do not intend to change beneficial ownership. In this case, there should be no taxable event even if the assets in the account have appreciated in value. You'd be wise to document the intention to retain beneficial ownership, perhaps in a letter to your child, so that this intention is clear.

Gains on qualified shares, fishing or farm property

If you happen to own shares in a small private company, fishing or farm quotas or similar property, you may be entitled to claim the lifetime capital gains exemption (LCGE) to shelter up to $800,000 of gains on these types of property from tax. Using the full exemption could save you up to $184,000 in tax if your marginal tax rate is 46 per cent. The tests that you must meet for your shares, fishing or farm property to qualify for the LCGE are complex and I'd put you to sleep if I tried to explain it all here, so be sure to visit a tax pro to discuss it – he or she will put you to sleep instead.

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.