Q: I foolishly bought 20 stocks on the TSX a couple of years ago in a non-registered account. They will be subject to capital gains when sold. One of them lost almost all its value. The others have held their own or made gains. I want to transfer the stocks to my TFSA, but obviously, don’t want to incur the full tax penalty. What would be the best way to mitigate this mistake?
A: Andrew, if you’re concerned about capital gains tax, you didn’t make an investment mistake. There are lots of portfolio managers buying winners only to find they’re really losers, which is one reason for year-end tax loss selling. True, you may have been better off making the initial investments within your TFSA.
Unfortunately, if you have a capital gain you will have to pay the tax; however, before you create the gain, think about ways to offset, defer, or minimize the tax or the effect of the tax. The gain will be created by either selling the stocks or transferring them to your TFSA.
You can offset the tax with capital losses. Losses can be carried forward indefinitely, and you can subtract the loss against any gains you’ve had within the last three years, reducing the tax owing.
You could defer the tax by selling or transferring the stocks to your TFSA over two or more years. You could also make an RRSP contribution for the amount of the taxable gain, which is 50% of your total gain. If you do this, use the RRSP gross up formula to make the best use of your contribution. The gross-up formula is this: What you should contribute = Your planned contribution / (1 – Your marginal tax rate %). (I have a short video that explains the method more fully at RRSP gross up formula.)
Have you reduced your gain and increased your loss by subtracting your brokerage fees from the gain or loss? A capital gain/loss is calculated as the Proceeds of Disposition – Adjusted Cost Base – Outlays and Expenses.
Is there a way for you to minimize the impact of the tax? If you’re incorporated, have RRIF income, or some control over your income, does it make sense to reduce other taxable sources in the year you have the capital gain?
A final consideration is transferring your spouse’s losses, if any, to you. If your spouse has a stock that has lost value, they could sell the stock, and if you buy it back within 30 days your spouse will be denied the capital loss, but the adjusted cost base ACB will be transferred over to you. So now you have a stock with a value lower than the ACB. After 30 days you can sell the stock at its fair market value and higher ACB, creating a capital loss to offset the gain on your other stocks. I recommend consulting an accountant before implementing this strategy.
Allan Norman is a certified financial planner and chartered investment manager with Atlantis Financial in Barrie, Ont.
MORE FROM AN INVESTMENT EXPERT:
- Can a portfolio of just one ETF make sense?
- Is an RRSP worth it if you’re retiring abroad?
- I’m moving investments to an online broker. Will they cover my fees?
- Owning Canadian stocks as a U.S. resident
- Should couples hold duplicate investments?
- REIT investing: The risks of chasing returns
- The best way to use your RRSP to invest in real estate
- Where do I find good stock data for Canadian equities?