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Tax Planning in a Questionable Future Tax Environment
December 11, 2020
4:51 pm
dougjp
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Hearing rumors of possible tax increases is almost expected these days, with all the government spending, much of it unregulated and uncontrolled so it adds up to more than it otherwise should be.

The question in my mind is whether anyone will care about doing anything to recoup the massive ballooning deficits via tax increases, or will the government just make up some words to make it all insignificant, like its all fine, which is what they have done so far.

I can't see any leeway for tax increases when food costs are supposedly going up $ 700- per family next year, and gas costs are massively increasing thanks to the son of the father... Bankruptcies seem a much more likely headline.

Back to the topic specifically. So, now its December of 2020 and I'm hearing about, maybe, changes in the capital gains tax, and more. The impact on those who are solely into savings accounts and GICs is limited, however is anyone thinking of changing year end tax planning based on the unknown future? A change announced next year and going into effect next year could be a big tax trap.

Myself I'm making a small stock sale to generate capital gain in 2020 that I hadn't thought about seriously before. Crazy or?

December 11, 2020
5:31 pm
MG
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dougjp said

Myself I'm making a small stock sale to generate capital gain in 2020 that I hadn't thought about seriously before. Crazy or?  

It is not crazy at all. Even if tax rates were unchanged, it is prudent to try to spread one's capital gains over a number of years if possible. Sure beats having to sell and take all the gains in one year, possibly in a higher tax bracket.

December 12, 2020
5:11 am
Bill
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Can trigger capital gain any time, e.g. if it suits your tax purposes in any given year - just sell and then rebuy.

December 12, 2020
7:26 am
Patch002
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Consider selling stock that has a capital loss to offset capital gains, otherwise, you may be in a position where Tax Installments are necessary in 2021.

Note: You shouldn't re-purchase these stocks for 30 days otherwise it will be deemed a superficial loss and disallowed loss.

However, you could purchase a similar stock within the same sector i.e. Sell Suncor for a loss but buy Exxon, Chevron should you want Oil exposure.

December 12, 2020
9:15 am
dougjp
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All good points. And the 30 day same share repurchase rule only applies with a capital loss which I can't use this year.

The tax installment requirement comes into effect, in Ontario anyway, if taxes owing exceed $ 3,000-. Another factor I need to consider is OAS clawback, by way of increasing taxable income vs. that threshold, which for the 2020 tax year is
$ 79,054.00.

No wonder politicians think they can get votes by touting 'simple tax'. sf-laugh

December 12, 2020
10:38 am
Bill
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Regarding the OAS clawback, note that that threshold calculation is done before applying any capital loss amounts applied from previous years. For example, if you have a net taxable capital gain of $30K in a year that's how much will count towards your net income threshold calculation for OAS clawback purposes, even if you use/apply an offsetting $30K capital loss amount available from previous years to offset the current year's $30K gain.

December 12, 2020
1:13 pm
dougjp
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Bill said
Regarding the OAS clawback, note that that threshold calculation is done before applying any capital loss amounts applied from previous years. For example, if you have a net taxable capital gain of $30K in a year that's how much will count towards your net income threshold calculation for OAS clawback purposes, even if you use/apply an offsetting $30K capital loss amount available from previous years to offset the current year's $30K gain.  

Thanks again. And yes, despite 50% of the capital gain being taxable, they add the full gain to determine total income - can make a big difference re: OAS.

December 12, 2020
1:17 pm
pooreva
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If you worry regarding OAS clawback then you REALLY have great income in retirement... Enjoy life with >70K income in retirement...

December 12, 2020
1:50 pm
Norman1
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dougjp said

Thanks again. And yes, despite 50% of the capital gain being taxable, they add the full gain to determine total income - can make a big difference re: OAS.

OAS clawback is based on line 23400 (net income before adjustments) that exceeds $77,580 (for 2019). There is no addition of the non-taxable part of any capital gains.

December 12, 2020
2:14 pm
dougjp
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Norman1 said

dougjp said

Thanks again. And yes, despite 50% of the capital gain being taxable, they add the full gain to determine total income - can make a big difference re: OAS.

OAS clawback is based on line 23400 (net income before adjustments) that exceeds $77,580 (for 2019). There is no addition of the non-taxable part of any capital gains.  

It took me forever to find the 2020 amount, and gave up finding it on the government site after many searches there. Took seconds on Google.

OK but now I'm confused. Admittedly I haven't gone through the details of a tax return to see all the components that make up line 23400. Lets say for example a person's income from sources other than capital gain totals $ 50,000-, and the total net capital gain was $ 10,000-. Are you saying line 23400 will read $ 55,000-, as half the capital gain is not taxed? Sort of the opposite effect compared to the dividend gross up?

December 12, 2020
2:40 pm
topgun
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I use Turbotax 2019. There is a planning mode for 2020. OAS claw back starts at $79,074. 1/2 of capital gain is taxable. If gain is $10,000, $5,000 is added to line 12700 which is reflected in line 23400. This will affect claw back if it makes line 23400 greater than $79,054. If you have a capital loss from prior years this lowers taxable income on line 26000.

Have a Great Day

December 12, 2020
5:10 pm
Bill
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Exactly, topgun, it's line 23400 that is used for OAS clawback purposes even though you might have an offsetting amount later on line 25300 to the taxable capital gain you reported in the amount on line 23400.

Yes, dougjp, line 23400 will say $55K in your example, even though you might be able to offset the $5K taxable capital gain because you have $5K net capital losses from previous years carried to line 25300 and thereby bring your taxable income back down to $50K. The OAS clawback threshold calculation looks to line 23400, that was my only point above. So I disagree with your comment "they add the full gain to determine total income - can make a big difference re: OAS.", line 23400 only contains the 50% taxable capital gain amount for the year.

December 12, 2020
6:36 pm
Norman1
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dougjp said

OK but now I'm confused. Admittedly I haven't gone through the details of a tax return to see all the components that make up line 23400. Lets say for example a person's income from sources…

It will be clearer if one has a look at one of the T1 General returns, like the one for Ontario.

Page 3 is where "total income" is calculated.

Page 4 is where "net income before adjustments" and "net income" are calculated from "total income".

Page 5 is where "taxable income" is calculated from "net income".

I'm guessing you've been using tax software and not printing out the resulting return! sf-laugh

December 12, 2020
8:55 pm
Loonie
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I find taxtips.ca reliable for finding out the various thresholds when taxes kick in or end. The figure for OAS clawback for 2020 is correct at 79,054 "net income".

For anyone who wants to know, Federal tax rates change in 2020 at incomes of 48,535 and 97,069 and some above that which i don't have handy.

Quarterly payments don't kick in until you have two years out of three that you owe over 3000. This problem can be lessened by taking voluntary deductions from OAS or other pension income throughout the year. For those who don't have capital gains or losses to deal with, income can also be manipulated by making voluntary RIF withdrawals and having tax deducted at source to top up your bracket and possibly avoid being in a higher bracket later.

FWIW, I don't foresee significant increases in income taxes per se in the foreseeable future. Depending on who is in power, we may see various temporary taxes, a special health care tax, inheritance tax, consumption taxes, service cuts and delays, outsourcing, privatization, and so on.
One way or another, we will all be made to pay, and some of us already are, in loss of employment or reduced income through falling interest rates. In my view, these things are much more serious than what you should do about capital gains because they will affect everyone.
As for whether you should claim capital gains/losses, I think Bill is right. Do what works for you right now.

And if you made a profit or can afford it, you can reduce your taxes further by making a charitable donation. You can donate stocks directly, which I believe is an even better deal (haven't checked recently). And, just so you know I put my money where my mouth is, spouse and I have donated to 8 charities this year and will give to one more, despite reduced income. A lot of people and helping organizations can really use some help from the more fortunate right now.sf-smile

December 13, 2020
5:38 am
Bill
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On your tax return there are lines basically for total income, net income and taxable income, it's the last one that is relevant re what tax bracket you're in.

I tend to agree with Loonie that tax increases will be targeted rather than general income tax rate increases for everybody. Including changes to capital gains inclusion rates and taxation of dividends. Targeted tax changes are a better way to foster social division, "class"/gender/race/etc envy, to keep us squabbling with each other, and many popular politicians these days seem to like that.

December 13, 2020
6:58 am
Koogie
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Excuse me if I scoff at the idea of a "temporary tax" Remember, in many places income taxes were introduced as "temporary" measures to pay for various war efforts.

Given the existing tax burden and the decreasing return on further tax increases I think the greater danger coming is devaluation and its subsequent effects as it will be the only appreciable way for the federal government to get out from under this spending balloon. How one plans for that is open to debate.

I second the great free calculators at TaxTips.ca Every December and January sees me playing with them endlessly as I plan my remuneration for the coming year. Its not about how much you make, its about how much you keep.

December 13, 2020
11:13 am
dougjp
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Norman1 said

dougjp said

OK but now I'm confused. Admittedly I haven't gone through the details of a tax return to see all the components that make up line 23400. Lets say for example a person's income from sources…

It will be clearer if one has a look at one of the T1 General returns, like the one for Ontario.

Page 3 is where "total income" is calculated.

Page 4 is where "net income before adjustments" and "net income" are calculated from "total income".

Page 5 is where "taxable income" is calculated from "net income".

I'm guessing you've been using tax software and not printing out the resulting return! sf-laugh  

Bingo! How did you ever know! sf-laugh

December 13, 2020
12:50 pm
Norman1
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dougjp said

Myself I'm making a small stock sale to generate capital gain in 2020 that I hadn't thought about seriously before. Crazy or?

That may not look so great in hindsight. Tax-driven investment decisions don't tend to work out well. Remember those labour-sponsored venture capital funds?

Since I started investing, the capital gains inclusion rate has gone from 50% to practically 0% (capital gains exemption) to 66 2/3% to 75% and then back to 50%.

The best approach was to do nothing different.

There are lots of ways to structure capital gains tax changes. When income taxes on capital gains were introduced in 1972, the taxes only applied to any appreciation after December 31, 1971. That continues to apply today.

The fair market value on December 31, 1971 is still used for any capital property acquired before then for calculating taxable capital gains.

December 13, 2020
2:24 pm
dougjp
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In my case, it isn't an investment decision, nor is it tax gain and loss selling. I would be selling and buying back. Alternately, the pet phrase 'portfolio re balancing' whereby I sell something I think I have too much of that has gone up, and get into something else I've been looking at. The objective is purely as MG said, spread the tax out over years to minimize the annual tax percentage.

The rumor being thrown around that I alluded to in the first post was taxable capital gain going from 50% back up to 75% next year. When we consider the 'effective majority' in power today (Liberal with, as I see it, semi-automatic backup by the NDP in anything left wing), and who raised and who lowered the capital gain tax percentage in the past, the possibility can't be dismissed out of hand. Its just an added reason for the objective noted above.

This thread provides really valuable information and I'm sure I'm not the only one who has learned from it. Thanks all. sf-smile

December 13, 2020
2:40 pm
savemoresaveoften
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make the principal residence capital gain taxable will cool down the housing market and earn the govt a decent revenue.
Its a much more sensible approach than bumping capital gain inclusion rate up, which is the NDP way of targeting the rich. What the economy needs is to encourage capital investment, not penalize the investor.

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