The equity markets are a strange thing. Every time one person sells, another one buys, and they both think they're smart. That's just the way it is. If the truth be known, regardless of whether you're making good investment decisions or bad, there are some things you should consider as we approach year-end.
Wait until 2018 to purchase certain investments
Are you looking to invest in an interest-bearing security, such as a guaranteed investment certificate (GIC), that has a maturity of one year or longer? If so, consider waiting until 2018 before making the investment. This way, you won't have to pay tax on any accrued interest until 2019 – the year of the first anniversary of the investment. Also, consider waiting until early in 2018 to purchase any mutual funds that are expected to make taxable distributions before the end of 2017, otherwise, you'll face taxes in 2017 on those distributions.
Trigger accrued losses before year-end
Did you report capital gains in one of the three prior years (2016, 2015, or 2014)? If so, or if you've realized capital gains in 2017, consider selling your losers before year-end to apply those capital losses against the gains from this year (which must be done first), or against gains from one of the three prior years. Excess capital losses can be carried forward for use indefinitely. See my article from Sept. 28 (tgam.ca/2xRt7yh) for more ideas related to your capital losses.
Trigger capital gains before year-end
Why would you ever want to realize a capital gain before year-end? It could make sense if you can sell an investment without creating a tax liability. Perhaps you have capital losses to use up, or the capital gain will be taxed in the hands of someone who will pay little or no tax (in-trust accounts for children, for example). You might also choose to sell and trigger a capital gain if you expect your marginal tax rate to be much lower in 2017 than next year, and you're thinking of selling anyway. If you sell the investment, then reinvest the proceeds – even in the same security – you'll create a new, higher adjusted cost base, which will save tax later.
Give investments to a child
If you've got an investment that has dropped in value, consider transferring it to a child before year end. This will trigger a capital loss that you can use to offset capital gains, and will pass the tax liability on any future growth in the investment to your child. You'll also minimize probate fees on those investments at the time of your death.
Donate securities to charity
Donating by year-end will provide you with a donation credit, and tax savings, for 2017. If you're considering disposing of certain publicly traded securities anyway, think about donating those securities to charity.
Any resulting capital gain on the donated securities will be eliminated, while in return you'll receive a tax credit for the donation.
Claim a capital gains reserve
If you're thinking of selling an asset by year-end at a profit, consider structuring the sale so that you collect your sale proceeds over more than one year. You're able to spread the capital gains tax liability over a period of up to five years if you take payment over a period of up to five years. Consult a tax pro to structure this properly.
Invest in offshore funds wisely
In the past couple of years, the taxman has targeted investors who have invested in funds that are located outside of Canada. If one of your main reasons for making these investments is to avoid tax, our tax law will cause you to pay tax annually on a deemed interest amount. The reality is that most Canadians who make these types of investments are not doing so for tax reasons; they are typically choosing investments they simply can't find elsewhere.
Set yourself up for success in 2018 by being prepared for a conversation with the taxman if you're investing in these funds. How? By creating an Investment Policy Statement that details your investment objectives and clarifies that tax reduction or deferral is not a main reason for making the investment; have a discussion with your investment adviser about this issue and speak about the fact that tax is not one of your main reasons for making the investment (and document this discussion by keeping minutes on file); and choose a Canadian money manager if you can find one comparable to the offshore fund you're in. Finally, if the cost amount of your offshore property is less than $100,000 in aggregate, you won't have to report these assets on Form T1135, which will likely take you off the taxman's radar.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.