|
Vancouver, B.C. (October
27, 2000): Finance Minister Paul Martin
recently presented the Federal mini budget containing
several income tax changes that affect the capital
gain and capital loss strategy for the year 2000
and beyond. It is worth noting that these are
only provisions and some modifications may occur
before they become laws.
Adrian Mastracci, president
of KCM Wealth Management, an independent,
fee-only investment counsel and financial advisory
firm in Vancouver says, "individuals, family trusts
and businesses should thoroughly review their
year 2000 situation to take full advantage of
the opportunities".
Mastracci suggests calculating all
existing capital gains and losses. There are now
three different inclusion rates and periods for
calendar 2000 as follows:
- 75 percent for the period January 1 to February
27, 2000
- 66 2/3 percent for the period February 28
to October 17, 2000, and
- 50 percent for the period October 18 to December
31, 2000.
Mastracci's recommendations for
the year 2000 capital gain strategy are:
- If you do not have a written long-term game
plan, attend to this first as it charts the
course of your success.
- Your capital gain strategy must be consistent
with your long-term goals, such as financial
independence and retirement.
- Judge your current portfolio on its appropriateness
to achieve your long-term goals. If the portfolio
is not appropriate, this is your opportunity
to review and modify it.
- Keeping in mind your long-term goals, and
the reasons why you purchased the individual
securities, review them by asking yourself,
"how does each security now fit into my long-term
plan and, if not, what has changed".
- Conventional tax wisdom suggests delaying
the realization of a capital gain until next
year when lower income tax rates take effect.
However, Mastracci says, "I believe in realizing
the gain or loss because it is the intelligent
investment decision, not because of income tax
reasons. The investment merits of the individual
securities are always uppermost while tax matters
are secondary considerations".
- Avoid playing the market timing game, which
is a losing strategy, when considering your
buy/sell decision of individual securities.
- Those who have gains or losses in two or three
periods must use a complex formula to determine
the average inclusion rate for the year 2000
tax return.
- If applicable, consider the capital losses
carried forward and an allowable business investment
loss (ABIL) in your year 2000 scenario.
- Owners of small businesses and active farms
are reminded to review the applicability of
the $500,000 lifetime capital gain exemption.
This provision is not new and applies to the
disposition of "qualifying" shares of a business
or active farm. The income tax savings approximate
$125,000 (in the 50% tax bracket) for those
who use the full exemption whereby $250,000
(at the 50 percent inclusion rate) is added
to taxable income.
- The $500,000 capital gain exemption requires
the business or active farm to qualify for 2
years before the sale. Accordingly, compliance
is part of your overall capital gain strategy.
- Review the alternate minimum tax (AMT) that
can be triggered by the $500,000 lifetime capital
gain exemption and the cumulative net investment
loss (CNIL) restrictions.
- Businesses who operate on non-calendar year-ends
should be extra careful on how the three different
inclusion rates and periods fit when calculating
the business capital gain scenario.
- Owners who sell and reinvest the proceeds
of a qualifying business into another are advised
to review the capital gain rollover provision
that has increased from $500,000 to $2 million.
Mastracci says, "I counsel my clients
to review all elements of their capital gain strategy
to maximize the benefits of the applicable tax
provisions. Clearly, the year 2000 capital gain
strategy requires considerable thought, especially
in view of the recent mini budget".
|
