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By Gigi Suhanic
National Post
FP Money
Saturday, March 29, 2003
Question: What is important in planning my
2003 capital gains and losses strategy?
Answer: If fundamentals have changed, review
investment losses to offset 2003 gains or those
of the prior three years. Unused capital losses
carried forward from previous years also offset
2003 gains, says Adrian
Mastracci, president
of KCM Wealth Management in Vancouver.
Factor in reinvested mutual fund distributions
for all securities sold. If you own, or will
be purchasing mutual funds, expect the capital
gain/loss distributions in December.
Adrian
Mastracci, president of Vancouver based
‘fee-only’ KCM
Wealth Management, says, “If fundamentals
have changed, review investment losses to offset
2003 gains or those of the prior three years.”
A capital outlay, say the new roof on your
rental property, increases your cost base if
you sell the property in 2003. Also deduct
all commissions paid on investments you sell
in 2003.
You may also have capitalized loan interest,
likely on bare land, which could be accounted
for upon sale of the land. Recapture of previously
claimed capital cost allowance may increase
your 2003 taxable income.
Crystallization of your business, or operating
farm, may qualify for the $500,000 capital
gain exemption. The deferral rules of capital
gains help if you sell your business and buy
another qualifying one.
Question: What is the $1,000 pension income
tax credit?
Answer: Taxpayers age 65 or older receiving
eligible pension income may claim tax credits
for up to $1,000 of pension income. Please
note that CPP, QPP and OAS do not qualify.
You may also be able to transfer unused credits
to your spouse, says Mr. Mastracci.
The most common eligible pension receipts
include superannuation, pension fund, taxable
foreign pensions, RRSP annuity and payments
from a RRIF.
Taxpayers aged 65 or older can create qualifying
income for this credit by converting some of
the RRSP into a RRIF or life annuity. They
may also use an annuity payment from a DPSP,
or purchase a simple life annuity with other
available capital.
Taxpayers under age 65 must receive pension
plan payments in the form of annuities, or
an annuity payment if your spouse became deceased.
Question: My uncle died in England a few months
ago. There was no will; my brother, sister
and I as closest relatives inherited the estate.
It includes shareholdings in many public companies.
CCRA confirmed that no tax is payable on the
amount I received. Death duty was paid on the
value of his estate at the exact date of his
death. However, as he left no will, there was
a three-month delay before the proceeds were
distributed. If I now sell the shares, may
I claim as a capital loss the decline in the
share price from the date of my uncle's death?
May I also claim as a loss any decline in value
because of the shift in exchange rates?
Answer: You will be entitled to claim a capital
loss equal to the difference between the proceeds
you received when you sell the securities,
converted into Canadian dollars on the date
of sale, and the adjusted cost base of those
securities, says Jamie Golombek.
The adjusted cost base of the securities will
be based on the price or fair market value
of the securities on the date of death, converted
into Canadian dollars using the exchange rate
in effect on that date. Thus, the capital loss
includes both the decline in share price and
the decline in value due to the fluctuation
in foreign exchange rates.
The reason you are entitled to use the fair
market value of the securities as your adjusted
cost base is because upon your uncle's death,
the shares were owned by your uncle's estate,
which is considered a testamentary trust for
Canadian tax purposes. Under Canadian tax law,
the trust is permitted to distribute its assets
to its capital beneficiaries at the adjusted
cost base of the securities. Since the trust
(i.e. the estate) acquired the securities upon
your uncle's death, the adjusted cost base
of the securities was equal to the fair market
value on the day your uncle passed away.
Question: Is there a rule of thumb to follow
when figuring out how much to invest in RRSPs
to lower income tax payable at the end of the
year?
Answer: The rule of thumb is basically, put
in as much as you can without jeopardizing
your cash flow or creating debt that can't
be paid off quickly, says Ryan Beebe.
What individuals should look at is putting
enough in to bring taxable income down to the
lowest possible marginal tax rate. Today those
rates (federal) are 16%, 22%, 26% and 29%.
For example, if a person is earning $35,000,
he/she would be in the 22% marginal tax bracket.
To get down to 16% they would need to make
a contribution of $3,324 as the income level
at which the 22% bracket begins is $31,677.
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