Year-end tax planning

[Bylo Selhi]

The year-end scramble to beat the tax man

The deadline is fast approaching for taking end-of-year action to reduce taxable income. While 2006 taxes must be filed by April 30, 2007, most transactions capable of reducing 2006 taxes must occur before midnight on Dec. 31. These include charitable gifts, medical expenses (including laser eye surgery), political contributions, union and professional membership dues and certain child and spousal support payments, according to a client advisory from KPMG...

December is also the month for tax-loss selling. The practical deadline is Friday, Dec. 22, since three business days are needed to allow trades to settle... However, investors with no offsetting losses may want to hold off crystallizing profits in 2006. When the federal budget comes down in February or March, it's expected the Tories may finally deliver on their promise of reduced capital gains taxes...

For charitable givers who have unrealized capital gains in non-registered accounts, consider donating publicly traded shares to charity. Such donations made after May 2, 2006, are no longer subject to capital gains tax. Donors get the regular tax credit for donations so those in this position may find it advantageous to donate appreciated securities rather than cash. The securities sold can later be repurchased -- while there are rules against incurring "superficial losses," there are no such prohibitions against "superficial gains," says Jack Courtney, assistant vice-president of tax and estate planning for Investors Group...

[DRJACK]

Has anyone here actually donated shares to a charity? What are the mechanics?

I presume that ABC Charity does not want to physically receive 35 shares of XYZ Corp. Do you simply sell the shares and donate the cash proceeds? If so, what records are required for tax purposes?

[patriot1]

Since money is fungible, this would effectively mean that anyone making a charitable donation gets a capital gains exemption of some amount under the amount of the donation (mkt value - ACB), plus the tax credit for the donation itself.

In economic terms of course, it wouldn't be any different if you were required to directly transfer the shares to the charity, although it would be less flexible.

[Bylo Selhi]

Has anyone here actually donated shares to a charity? What are the mechanics?

Yes, several times, including as we speak. Contact the charity and ask them if they're set up to receive securities. (They need to have a brokerage account.) They'll give you the appropriate account/transfer information.

Then send/fax a written request to your broker with that information. Here's one example of what you'd need to send. (I found it by Googling on the fax number I use to send my transfer requests to TD Waterhouse.)

Your broker transfers the securities to their broker. AFAIK Canadian discount brokers do the transfers to charitable organizations without charging fees as a gesture of goodwill. (Let's hear a round of applause!) Their broker then sells the securities on the open market.

If you intend to do this, start the ball rolling on Monday. It takes at least a couple of weeks, perhaps more the first time as you learn the details of the process for your charities and broker. Year-end is fast approaching. You can't leave this until New Year's Eve as you can (and I've done) with last-minute cash donations over the Internet

I presume that ABC Charity does not want to physically receive 35 shares of XYZ Corp.

Actually they do and so do you...

Do you simply sell the shares and donate the cash proceeds? If so, what records are required for tax purposes?

No. You have to donate the securities, not the cash proceeds. If you sell first the capital gain is yours and you lose the CG tax exemption.

The charity will send you a receipt that indicates that the contribution was "in-kind". The amount on the receipt is the fair market value. On your tax return you have two steps, (1) claim their amount as a charitable expense and (2) claim the 0% CG inclusion rate on the transferred securities on the schedule for capital gains.

If your charity does not have a broker, there's Link Charity. (Caveat: I've never used them and only briefly looked at their site in the past.)

[DRJACK]

Thanks for the help Bylo.

I'm with RBC-DS. All that was required was a few phone calls. Donations under way. Like the discount brokers, they waive transfer fees for charitable donations.

This capital gains exemption is very helpful. It allows me to substantially increase my charitable donations without increasing my out of pocket expenses.

I encourage others to look into this.

[Bylo Selhi]

I'm with RBC-DS. All that was required was a few phone calls. Donations under way. Like the discount brokers, they waive transfer fees for charitable donations.

I guess that's what they mean by "full service" broker. In my case, with TD Waterhouse, the first time it took almost 2 weeks just to find the right department and phone numbers

[Norbert Schlenker]

A couple of worthwhile tax articles from advisor.ca.

http://www.advisor.ca/practice/special_ ... 54235_4192

http://www.advisor.ca/practice/special_ ... 54423_4476

[Bylo Selhi]

http://www.advisor.ca/practice/special_report/article.jsp?content=20061208_154235_4192

Charitable donations
Large donations (in excess of $25,000) and donations of property in kind continue to attract scrutiny. This attention is likely the result of the multitude of "structured" or "leveraged" donation schemes developed over the last few years prior to the recent introduction of legislation to shut them down. There is a perception that charitable donation tax credits have been abused, thereby warranting additional scrutiny.

Which reminds me to point out that a consequence of making an in-kind charitable donation is that it makes your return ineligible for filing online using a tax preparation package like QuickTax. That means you have to print out the entire return, attach all of your receipts and backup documentation, then schlep it all down to the post office. Presumably that's because the "in-kind charitable donation" now triggers alarm bells with CRA for the reasons mentioned above. That said, my suspicion is that in-kind donations of publicly-traded securities where the claim is made at easily verified fair market value, won't necessarily result in a request for further documentation or trigger an audit.

Apart from the hassle of printing, shuffling and mailing a wad of paper, this could be an important issue for some, e.g. people who leave tax-filing literally to the last minute and then discover they can't complete their filing online.

Also, when mailing tax returns bear in mind It's harder to prove taxes on time.

[like_to_retire]

Apart from the hassle of printing, shuffling and mailing a wad of paper, this could be an important issue for some

I doubt if anyone here is able to use Netfile since paying foreign taxes to more than one country removes the ability to use it...

ltr

[Bylo Selhi]

Apart from the hassle of printing, shuffling and mailing a wad of paper, this could be an important issue for some

I doubt if anyone here is able to use Netfile since paying foreign taxes to more than one country removes the ability to use it...

Prior to TY2005, one could NetFile a return with in-kind charitable donations. That CRA policy changed presumably thanks to the proliferation of "buy low, sell high" charitable scams.

In any case until last year I'd been NetFiling for years even though my returns also had declarations of foreign income from several mutual funds and ETFs both domestic and US-based. In all cases the foreign income on the T-slips wasn't broken down by country of origin apart from US.

Are you sure your situation isn't the exception rather than the rule?

[FrugalTrader]

What if I were to donate some of my losing stocks to a charity? Could I still deduct the loss against my gains AND claim the donation tax credit?

[Norbert Schlenker]

Don't. Just sell the shares and donate the money you get from the sale.

[like_to_retire]

In any case until last year I'd been NetFiling for years even though my returns also had declarations of foreign income from several mutual funds and ETFs both domestic and US-based. In all cases the foreign income on the T-slips wasn't broken down by country of origin apart from US.

Yeah sure, but you have to say it all comes from one country such as the US, even though it doesn't.

Are you implying most people here make this "unintentional" error to get through the NETFILE filter?

ltr

[Bylo Selhi]

Yeah sure, but you have to say it all comes from one country such as the US, even though it doesn't.

It's not me who says it. It's BGI, Vanguard and my discount broker, all of whom issue the T-slips (and US equivalents) that say it even though the underlying investments come not only from the US but also myriad EAFE and EM countries.

Are you implying most people here make this "unintentional" error to get through the NETFILE filter?

No, but you seem to be implying that BGI, Vanguard and my discount broker are making it so

I'm not trying to be argumentative. That's the way my foreign income gets reported. It's always qualified for NetFile. Even last year's return qualified for NetFile after I tested it without the in-kind donations but with the foreign income. So I'm simply asking what you might be doing differently that disqualifies you from using NetFile, assuming that's indeed the case.

[like_to_retire]

So I'm simply asking what you might be doing differently that disqualifies you from using NetFile,

I find that if I add a second country on top of USA to Quicktax, to account for the foreign tax from EAFA or EUROPE or whatever, then it says no-go. So, I cheat a bit and say it's all from USA and it works fine. But, it ain't true..... it just works... I justify it by asking myself, "Is Europe a country?"

ltr

[FrugalTrader]

Don't. Just sell the shares and donate the money you get from the sale.

Ah Norbert, a solution that should have been so obvious to me.. Thanks!

[adrian2]

Don't. Just sell the shares and donate the money you get from the sale.

That is not required. The tax result is exactly identical whether you donate the losing shares or you sell first and donate the proceeds. You may be mixing it up with contributing shares to an RRSP, in which case any capital loss is denied - there is no such treatment with a donation (source - a recent Talking Tax program on RobTv).

[DRJACK]

Bylo noted upthread that QuickTax won't allow you to netfile if you made in-kind charitable donations.

This appears to no longer be true. I just netfiled my 2006 return, which included in-kind donatios, no problem.

[Bylo Selhi]

This appears to no longer be true. I just netfiled my 2006 return, which included in-kind donatios, no problem.

Thanks for the followup. I used QT as well this year and had no trouble NETFiling even with the in-kind donations. Hat's off to CRA for making improvements. (I hope that wasn't what broke NETFile a month or so ago )

[Peculiar_Investor]

[Hat's off to CRA for making improvements. (I hope that wasn't what broke NETFile a month or so ago )

The rumour that I heard was they implemented an upgrade for the new daylight savings time rules and that caused the problem with NETFile. Perhaps they used the same programmers and testers as RIM!

[scomac]

It's getting to be the time of year again to begin to think about harvesting some capital losses for tax planning purposes. Unfortunately, due to the strong performance of the markets again this year, my options for tax loss harvesting are rather limited (not complaining mind you). This leads to two questions:

1. Am I correct to assume that two different series of preferred shares from the same issuer are deemed "different securities" so as not to trigger the superficial loss rule?

2. Has anyone used bonds to harvest capital losses? IIRC, this was a popular strategy of RBC's John Kellet as a means of improving tax efficiency of the RBC Dividend Fund.

[kcowan]

2. Has anyone used bonds to harvest capital losses? IIRC, this was a popular strategy of RBC's John Kellet as a means of improving tax efficiency of the RBC Dividend Fund.

I have used them every year for MIL. ISTR that it requires a custom schedule with all the detail to post a summary line. Accounting was a challenge because the detail dated back to when she had an expensive portfolio manager and a different bank.

[Bylo Selhi]

Fifteen ways to reduce your 2007 taxes

Fall is always a good time to take stock of one’s tax situation. As several weeks remain before the end of the year, now is the time to review your 2007 transactions and make any necessary adjustments. Tax planning is always an issue, whether you work, are retired, operate a business directly or operate a business through a corporation. Here are fifteen ways, among others, to save on taxes for 2007.

[Pobre]

Fall is always a good time to take stock of one’s tax situation.

We had a small lump of US dollars that had been parked for about a year in a US $ MM fund. Decided to work out the ACB in Cdn dollars, which required sorting out the exchange rate on the monthly distributions. Took about an hr, but had a capital loss of about $600, sooo sold it and will buy back in a month (in the wife's name as that is where we want the US $ to be available).

Unusual to claim a capital loss on a MM fund, but a loss is a loss.

[AltaRed]

I have been thinking of doing the same thing shortly with my PH&N US$MMF. Worth ~$4k in capital losses to me. In hindsight, one should have had all of their USD in such funds (which I did not).

One has to wonder how CRA might react to all this if thousands (or millions) of investors have been doing the same thing. It is not like one intentionally invests in MMF for capital gains (or in this case, capital losses). Do any of the experts here thnk this is challengeable by CRA?