Capital Gains, Interest, Dividends | Using Your Capital Losses Wisely | Income Splitting Capital Gains | Low Interest Rates! Tax-saving Strategies | Trusts
Capital Gains, Interest, Dividends
|
2003 Effective Top Rate of Tax(Federal and MB)
|
After Tax Return on $1,000 of income
|
|
| Capital Gains |
23.20 %
|
768
|
| Dividends |
35.08 %
|
649
|
| Interest |
46.40 %
|
536
|
- Interest taxed on accrual basis
- Dividends taxed as received (even if DRIP)
- Capital gains only taxed when actually realized i.e.
when investment sold
Advantages (Capital Property)
- Tax rate substantially lower
- Investor controls when taxable event occurs
- Substantial tax deferral opportunity by using Buy and Hold strategy
Assume 8% Rate of Return (long term yield)
Taxpayer in Top Tax Bracket
Using Your Capital Losses Wisely
Capital Losses?
- Generate a refund at April 30, 2004!
- Capital losses can be carried back 3 years. A 2003 capital loss can be used in:
- 2002
- 2001
- 2000
- Losses carried back to 2000 could save you as much as 37.5¢ on the dollar vs. only 23.2¢ in 2003 and beyond.
Strategies:
- Trigger loss in 2003 and CB to 2000
- Beware Superficial Loss Rule must wait 31 days to buy back same security
- Could buy a lone fund and then switch to the original fund after the 31 days
- Or could sell non-registered investment and have RRSP buy back same security
- No gains in prior years? Perhaps spouse has capital gains
- You would sell and trigger loss
- Spouse buys identical shares
- Your loss denied and added to spouses ACB
- Your spouse waits 31 days, sells security and uses capital loss
against gains realized in prior years
Income Splitting Capital Gains
- Invest for your children / grandchildren
- No attribution
- Capital Gains taxed at the Child’s marginal tax bracket
- Sell securities with future capital gains potential to your lower-income spouse. This is onside provided that
- Sale occurs at fair market value and either
- Spouse pays for securities,
- Spouse issues a promissory note and pays interest on note at prescribed rate, at least within 30 days of year end
- CCRA prescribed rate only 3% can lock-in at this rate
- Spouse can deduct interest expense; you must report interest income
- Sale occurs at fair market value and either
Low Interest Rates! Tax-saving Strategies
Registered Education Savings Plans
- Canada Education Savings Grant (CESG) supplements new contributions
made to RESPs - 20% supplement – $400 maximum/year
- Lifetime maximum of $7,200 ($400/yr x 18 years)
Discretionary Trusts
- Formalized arrangement of providing for your children, grandchildren
- Income attribution rules can apply for interest and dividends but not capital gains
- Control given to the trustees to manage and direct use and investment of trust assets
Alberta Resident Trusts
- Use of Alberta resident trustees
- Investment income taxed at Alberta provincial tax rates
- Complex structuring issues
- Provincial anti-avoidance provisions