Tax Questions

[Dingo]

Thanks bruce.

[Bulldogge]

Can someone answer this fictitious tax related question?

Say someone bought 100 shares of stock x on margin on Jan 01/2007. During the year they paid $500 in interest and collected $400 in dividends. During the year the 100 shares of stock x increased in value to $11,000.

On Dec 31, 2007 the stock x shares are paid for.

On Jan 01/2008 the stock x shares are transferred to an RRSP account.

Since its now 2008, and the shares are no longer on margin, the corresponding tax deduction for 2007 would be $11,000 for the RRSP contribution during the first 60 days of 2008 and $500 for the interest paid in 2007?

Of course the $400 dividend income would also be added to taxable income.

Thanks.

[brucecohen]

Looks correct to me. The only omission is that the transfer to the RRSP constitutes a disposition so capital gains tax will be due for 2008. And, of course, the dividends are taxable for 2007.

[pitz]

One more note: If you already own 'x' outside of a registered account, you have to average the cost basis for the purposes of computing the capital gain on the disposition (RRSP contribution) of the shares.

You are not entitled to segregate a block of shares of 'x' to be your next years' RRSP contribution. And it doesn't matter if you hold them at different brokers or anything like that.

[Bulldogge]

thanks - forgot about the capital gains.

[adrian2]

On Dec 31, 2007 the stock x shares are paid for.

On Jan 01/2008 the stock x shares are transferred to an RRSP account.

Since its now 2008, and the shares are no longer on margin, the corresponding tax deduction for 2007 would be $11,000 for the RRSP contribution during the first 60 days of 2008

I don't see how "x shares being paid of" is relevant to the scenario. Assuming you have enough margin available, you can transfer any or all the shares to your RRSP. It will be treated as a disposition, if there is a gain you will pay CG tax, if it's a loss, tough luck.

[Doug]

I am a novice investor. Now I know that broker's commissions and US stock taxes are deductible from income tax when you sell the investment and pay capital gains or claim capital losses. I'd like to thank AltaRed for that help. Are there any other investment costs which are tax deductible?

[Jo Anne]

I am a novice investor. Now I know that broker's commissions and US stock taxes are deductible from income tax when you sell the investment and pay capital gains or claim capital losses. I'd like to thank AltaRed for that help. Are there any other investment costs which are tax deductible?

Interest on money borrowed to purchase investments in non-registered accounts.

Maybe safety deposit box charges if you store share certificates in them.

[Knowsitall]

I am a seasoned old CA and I deduct everything I think I can support as a deduction.

I must admit I have had my moments with CRA but remember they are not the brightest lights on the block.Many times they play the treat game and this is where you take them to the floor.

Over my career I figure I am responsible for full time employment of at least the equivalent of of 2 CRA reps.

Don't be scared to receive little computer notices with sexey red Canadian flags on the top corner.

Appeal everything except an item where u have committed a deliberate tax fraud

[queerasmoi]

Is there a specific place on the return to deduct brokerage commissions and the like? Or should I just do so by including them appropriately in ACB calculations?

[morleymarkle]

Seconding queerasmoi's question. I thought commission was handled by adjusting the cost base on purchase, and the sale amount on sale.

[like_to_retire]

I thought commission was handled by adjusting the cost base on purchase, and the sale amount on sale

Correct...........

ltr

[patriot1]

Seconding queerasmoi's question. I thought commission was handled by adjusting the cost base on purchase, and the sale amount on sale.

Take a look at Schedule 3. Purchase commissions are included in ACB, but there is a separate column for sales commissions (outlays and expenses).

[squid]

Can you deduct the cost of converting currency for a US stock purchase?

[ghariton]

Can you deduct the cost of converting currency for a US stock purchase?

Your adjusted cost base, and your proceeds, are all recorded in Canadian dollars. That automatically adjusts for FX costs.

George

[morleymarkle]

Thanks for your replies ltr/patriot1. I'm only familiar with the discount broker situation; what other 'sales commissions/outlays/expenses' are one likely to encounter. Are you mainly talking about some managed portfolios; e.g. some of those accounts where they charge you x% of your balance per year for advice/management, in addition to any commissions they might make on trades?

If so, (dumb thought alert...), does this conceivably extend to the MER on mutual funds?

- and a minor query on Jo Anne's earlier point about borrowing to invest. I was under the impression that there was some vague caveat indicating that the investment had to provide some income/dividend return, or at least have the reasonable expectation of such in the future. Certain investments that had a large 'return of capital' component, such as some trusts, might not be appropriate or allowed?

Thx...

[patriot1]

Are you mainly talking about some managed portfolios; e.g. some of those accounts where they charge you x% of your balance per year for advice/management, in addition to any commissions they might make on trades?

Fees for a managed portfolio are carrying costs which are deductible against income. This is something completely different from sales commissions, which apply against capital gains.

If so, (dumb thought alert...), does this conceivably extend to the MER on mutual funds?

MER on a mutual fund is deductible against its income, not your income. Just as a corporation's expenses are deductible against its income, not the shareholder's income. A mutual fund is a trust or corporation and its expenses cannot be claimed directly by its unitholders.

The income from a mutual fund which is reported on your T3 is net of MER. That's what you pay income tax on, so yes the MER gets deducted from your income - it's just that the deduction takes place at the trust level rather than the unitholder level.

[active]

Are these good enough alternatives but different enough to pass the CRA superficial loss smell test?

VTI - SPY
EFA - VEA
INP - IFN
FXI - GXC

[patriot1]

Absolutely they are different enough.

[queerasmoi]

Are these good enough alternatives but different enough to pass the CRA superficial loss smell test?

VTI - SPY
EFA - VEA
INP - IFN
FXI - GXC

Other thoughts: Since VTI is a total market index and SPY is only large-cap, IWV (Russell 3000) or TMW (SPDR DJ Wilshire Total Market) could be another alternative if you want to maintain broad exposure. The MER is higher at 0.20% though. Also VXF covers the mid-small caps, so (SPY + VXF) could mimic VTI pretty well at a low MER.

For India exposure, you've listed INP (an ETN) and IFN (a closed-end fund). How about Powershares PIN, a true ETF? Although the MER's pretty high at 0.78%. But in these times of credit uncertainty, I'd be a little concerned about an ETN which is an unsecured debt obligation. And the closed-end fund has an expense ratio around 1.41%.

[patriot1]

Even if two ETF's cover the same index they are not identical properties. For starters, they have different MER's.

Also true WRT index funds.

[Bylo Selhi]

Even if two ETF's cover the same index they are not identical properties. For starters, they have different MER's.

Caveat: Even though I fully agree with you -- and put my money where my mouth is by switching from EFA to VEA a week or so ago -- there are some pretty knowledgeable people around who don't. There was an article a few years ago by the Canadian Tax Federation (written by Jamie Golombek IIRC) that warned people about the superficial tax loss rules when switching from one index fund/ETF to another that tracks the same index. At that time there was no precedent so Jamie's article was just a warning. I don't know if the situation has been clarified subsequently.

[IdOp]

Caveat: Even though I fully agree with you -- and put my money where my mouth is by switching from EFA to VEA a week or so ago -- there are some pretty knowledgeable people around who don't. There was an article a few years ago by the Canadian Tax Federation (written by Jamie Golombek IIRC) that warned people about the superficial tax loss rules when switching from one index fund/ETF to another that tracks the same index. At that time there was no precedent so Jamie's article was just a warning. I don't know if the situation has been clarified subsequently.

While in no way a tax advisor I agree also that they should be different. Do you have a link to the Golumbek article? I do recall a recent post (by brucecohen IIRC) in which he mentions an anecdotal conversation with a CRA official who warned that they would/could be regarded as identical property.

However, in addition to the MER and other points Bylo Selhi has previously made, I offer two more:

* If one looks at the prospectuses for such funds/ETFs there are a great many risk factors disclosed, which can and do vary from one similar product to another.

The next, I think, is the real kicker:

* If two products based on similar indices were regarded as identical property, this has more consequences than just superficial losses. It also would mean the cost bases of the products should be combined into one. So if you own TD US Index (unhedged) and SPY, for example, then if they were identical property you'd have to track their cost as one entity, etc. This would seem to be an endemic problem that everyone does wrong, if it were so. And if so, why is CRA not beating the bushes high and low warning people that they must do this?

My own reaction to all this, which could be wrong and is in no way advice to anyone, is not to be intimidated by such CRA FUD. I will switch to what I consider a different security. Let them find it and I will appeal. Bankrupt me with legal fees and I'll go on welfare! It would be great if someone with infinite financial resources would make an active effort to challenge governments all the way to the supreme court on these sort of "rules". (Perhaps Bill Gates? ... he's experienced in vapour-ware. )

[Shakespeare]

Personally, I would switch indexes to be safe - say, SPY/VGI or VGK:VPL 2:1 for EFA or VEA.

[active]

Thanks for the opinions.

IdOp, I don't mind being (reasonably) aggressive but I kind of like to stay off welfare.