Capital Losses

 

Date: 08-Oct-98 - 7:48 AM
Subject: No Load Funds vs Capital Loss
From: sanchio

For no-load equity funds.... or any no-load fund that typically pays a capital gain distribution at year end and lowers it's NAVPS accordingly at the end of the year..... is it not best sell now, claim the capital loss, then re-invest (assuming you believe the market will rebound and this fund will grow)?

If I just sit tight and the market rebounds from today's level, next year, these funds will hit me with a capital gain distribution.... may as well claim the capital loss now to protect myself in the future? Am I missing something?


Date: 08-Oct-98 - 8:26 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

Yup, that's all true.

But:

1. This strategy only applies to non-registered accounts (not RRSPs, etc.)

2. Be sure you really have a capital loss. If you've owned the fund for more than a couple of years you may instead trigger a capital gain on the sale.

3. After you sell, you can't buy back into the same fund for at least 30 days. Otherwise RevCan will disallow the capital loss.

4. Even with FE load funds, if you hold them through a 0% load dealer like E*Trade, you can crystallize such losses at no cost.

Anyone remember Trimark's 25% distribution last Christmas? The only winner on that one was Paul Martin.


Date: 08-Oct-98 - 9:18 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

And to add to Bylo's point, to crystalize losses even with DSC funds you can consider a switch to MMF (or some other fund) in the same family (Templeton International Stock to Growth, or what not). But if switch charges are involved, you'll have to get your pencil out.


Date: 08-Oct-98 - 9:42 PM
Subject: Re: No Load Funds vs Capital Loss
From: taxspecialist

Sanchio,

Your idea works as long as you expect a capital gains distribution this year. If there is no distribution expected this year, then you won't benefit much. Let me explain.

If you paid $100 for your fund units, and they have dropped to, say, $80, then you have an accrued capital loss of $20. Selling the units now will trigger that loss (but, as was mentioned, DO NOT repurchase units in the same fund until 30 days has passed, or your loss will be denied under the superficial loss rules). If you trigger this $20 loss and are then allocated, say, a $10 distribution at year end, the loss will offset the taxable capital gains distribution, and you'll have $10 of capital losses left over to be carried forward for use in a future year.

If you repurchase the units, or any fund units for that matter, with that $80 in proceeds you received on your sale, then your new adjusted cost base is $80. If the fund then rebounds in value next year to be worth $120, you will have a $40 accrued capital gain ($120 - 80) with $10 of capital losses carried forward. The result? You'd pay tax on a $30 gain if you sold next year at $120 ($120 - $80 -$10).

If you hadn't sold your units at all this year, your ACB would still be $100, and you'd have an accrued gain of just $20 next year.

To make a long story short, you'll pay less tax this year by triggerring the capital loss to offset this year's capital gains distribution, but at the same time, you'll pay more tax next year if you were to sell your fund units after they've gone up in value. This is still a good strategy since pushing the tax bill to a future year is usually better than paying the tax today. However, if your fund doesn't pay any capital gains distributions this year, the capital loss you realize won't help you and you might as well have just held the fund units.

Hope this makes sense.


Date: 08-Oct-98 - 10:18 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

But shouldn't the point also be made, tax specialist, that crystalized capital losses can be carried forward (as well as three years back), to be applied against distributions in future years? If the investor has a buy and hold perspective, then a tax-loss sale at this point might defer tax liability on future distributions over several years, especially with relatively tax-efficient funds. For example, I'm showing a 27 percent loss in my Sceptre Equity Growth fund. Crystalizing that loss now might be expected to relieve me of paying tax on distributions by the fund over several years.

There was a big discussion here at the Library back around Christmas time last year on the tax efficiency of holding equity funds vs. fixed income securities outside an RRSP. It seems to me that were that discussion to take place in the current investment climate, arguments for holding equities outside might have been substantially reinforced.


Date: 08-Oct-98 - 10:38 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Net capital losses (more cap losses than cap gains in a tax year) can be carried back 3 years or forward indefinitely to offset capital gains. So if you had '95-'97 net cap gains due to distributions in those years you can use this year's net capital loss to get money back from Paul Martin (well actually Herb Dhaliwal) next spring. So if there is a capital gain distribution that is less than your capital loss you could benefit 2 ways - a tax refund and tax deferral.

You can rebuy the fund immediately (you don't have to be out of the fund for 30 days) IF YOU MADE NO PURCHASES of units in the 30 days prior to the sale; i.e. the superficial loss rules don't apply.


Date: 09-Oct-98 - 12:29 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

Mikale, here's the CCH book Preparing Your Income Tax Returns:

"When a capital property has been disposed of after 1971 and the same or identical property is acquired within a period beginning 30 days before the disposition and ending 30 days after the disposition by you, your spouse or a corporation controlled in any manner by you and where the property is still owned by the acquiror at the end of the period, a capital loss arising from the disposition of the property will not be allowed as a deduction for tax purposes." Para. 579, 1995 edition.


Date: 09-Oct-98 - 8:11 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

"So if you had '95-'97 net cap gains due to distributions in those years you can use this year's net capital loss to get money back from Paul Martin (well actually Herb Dhaliwal) next spring."

This is an excellent suggestion -- especially for folks who bought into funds like Trimark or PH&N US Equity (to name a couple) in '96/'97.

Also, if you believe that stock markets have further to drop and you want to reduce your equity exposure, you can accomplish it with minimal tax liability by selling a combination of winners (Can/US Equities you've held for several years) and losers (Asia/Pacific, Resources and almost anything else you bought in the past year) so that the net capital gain is close to zero.

I wonder how many fund companies and/or advisers are recommending these strategies to their clients?


Date: 09-Oct-98 - 10:10 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Bylo, just following up your Trimark, PH &N comment... I wonder how many taxable unitholders have an ACB which is higher than the FMV of the units today. That problem will only deteriorate with the '98 year end distributions. Those investors might as well dodge this year's distribution and get some tax relief. IMO, this bear market state of affairs just underscores the major disadvantage of actively managed funds in taxable accounts - low tax efficiency and lack of control of one's investment tax bill.

Without sufficient advance knowledge of estimated year end distributions investors will be unable to properly assess and take advantage of your tax minimization strategy.

FWIW, if an investor is using a combination of active and passive funds, then the active funds should be placed in a registered account.


Date: 09-Oct-98 - 10:35 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

On the superficial loss rules, there technically is a 61 day period (30 days on either side of the sell date) to be aware of. So if you plan to buy back into the fund, wait at least 30 days then buy back in.

Bylo, you make some good points that I'm sure many FPs are not aware of. The superficial loss rules and frankly proper capital gains calculations are two tax rules that seem to cause confusion among some FPs.

Mikale, you're right in saying that fund companies tend to keep the distributions a bit hush-hush. I give Trimark credit for alerting the FP community well in advance of their distributions. That enabled advisors to take the appropriate action (if any) in light of the eventual tax consequence. A good practice might be to make habit of calling all mutual fund companies whose funds you hold in an open account, and inquire about planned distributions or YTD realized gains. Some will be like pulling teeth, but if your FP calls, they may be more willing to release the info.


Date: 09-Oct-98 - 11:15 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

mikale,

Agree 100% with both points. Folks should note however that these strategies can sometimes backfire. Earlier this year after getting a whopping big distribution in Dec97 that resulted in a big bonus for Paul and Herb, I moved a certain managed Canadian equity fund into my RRSP in order to avoid a repeat. The swap occurred near the top of the market. Now the fund is down some 20% YTD but as it's inside my RRSP it no longer qualifies for the capital loss.

OntFA,

You're absolutely right that for a DIYer to get estimates about upcoming distributions directly from most MF companies is like pulling teeth. The arrogance (e.g. "we suggest you contact your FP" as if one wouldn't know what to do with the information) is both gratuitous and patronising. As usual PH&N and Vanguard are the rare exceptions; they post the information on their websites.


Date: 09-Oct-98 - 11:16 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

rayw & OntFA,

Without belabouring the superficial loss rules (which were canvassed ad nauseum a couple of weeks back), the key word in the posted CCH handbook is "acquired". No purchase within 30 days prior to sale, no superficial loss for repurchase within 30 days following sale.

Why is there not better and full disclosure to unitholders of net (gains less losses) estimated distributions? Surely, there can't be that much "window dressing" happening at year end!


Date: 09-Oct-98 - 2:16 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

Sorry, Mikale, I don't really want to belabor the question, and certainly I'm no tax expert. But the interpretation of the superficial loss rule put forward by OntFA (which is also my own understanding) seems to me to be consistent with the CCH handbook and the view you put forward does not. Given that the matter is of some importance, I wonder if you could provide us with further references on the question?


Date: 09-Oct-98 - 2:35 PM
Subject: Re: No Load Funds vs Capital Loss
From: George$

On re-reading this informative thread I've attempted to summarize in my own mind what the message is. Here is my version.

The general rule is: "Preserve capital assets!!!"

That is, don't volunteer to diminish your capital assets via taxes. Defer any taxes on capital gains as long as possible. [While deferring taxes is automatic within an RSP account, it is not automatic outside an RSP but is still possible in some circumstances.]

In the specific cases of:

(I) - Unrealized capital gains (assuming no other considerations are involved) don't crystalize them. Let them ride. If you crystalize them unnecessarily, the capital gains tax paid will only reduce your capital assets investment base.

(II) - Unrealized capital losses, - in this case "it depends", as the unrealized capital loss represents a real asset that can be crystalized or else an opportunity to re-allocate assets with no tax consequence. That is: -

(a) If you have existing off-setting capital gains then one should by all means crystalize the capital losses as this reduces the taxes paid and so preserves the overall capital base.

(b) If you have no existing off-setting capital gains and no opportunity to generate one via sale of unrealized capital gain assets, then crystalizing the capital loss can work both ways. By crystalizing the loss, the potential benefit is that you can re-allocate your funds in a better investment, but you can also lose via a lost tax deduction if you are unlucky enough not to generate an off-setting gain in the course of the next three years.

(c) If you have no existing off-setting capital gains but can generate one via a corresponding sale of some appreciated but unrealized capital gain asset, then you may well consider doing this. In the ideal case you pay no net tax but then have the cash to better re-invest or re-allocate - as one wishes.

Any oversights on my part?


Date: 09-Oct-98 - 2:58 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

George, on your point (ll(b), it's my understanding that the net capital loss can be carried forward indefinitely. The three-year limitation is on applying this year's loss against gains in the past three years.


Date: 09-Oct-98 - 3:19 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

George,

There is a cliche - don't let the tax tail wag the investment dog.

Your item (II)(b): You can carry forward net capital losses until your death. Based on my understanding of your "persona", you likely have cap gains in the 3 prior years. Trigger losses (and don't rebuy the year end distributions) to get a tax refund on a net capital loss carryback. It effectively increases your after- tax capital base.

While I would take issue with Bylo that mutual fund companies have an obligation to render tax counsel, I certainly agree that many FAs would not have a clue as to how your capital base could be increased by tax loss selling and carryback - "The bear swiped us, but let's get some 'prepaid' dough back from our political masters" should be the mantra for taxable accounts. The silence thus far on this issue in this Forum is deafening. However, we are not into "tax sale" season quite yet which is now November once the market became efficient with the "January effect":-)


Date: 09-Oct-98 - 4:28 PM
Subject: Re: No Load Funds vs Capital Loss
From: George$

Ray and Mikale: Yes, thank you for the correction. My neurons must have been asleep on that one.

"There is a cliche - don't let the tax tail wag the investment dog." is a welcome reminder Mikale.

No I try not to let it do so but sometimes it gets fuzzy as to where the tail ends and the dog begins. To illustrate: a few weeks ago I was thinking of selling some Microsoft and buying Dell. I didn't. My problem is that almost 100% of my MSFT is capital gains. That means substantial taxes if I sell. And I could not convince myself that Dell was that much better than MS.

Why did I want to do this? If I was only buying today, I would buy Dell rather than MS. At this point I think Dell is a better growth prospect over the next five years than MS because its market capitalization is nowhere near as large as MS. It has lots of growth room left. MS may not being as large as MS is. Then, while MS has a solid monopoly market, and Dell does not, yet Dell does have a unique sales model that Compaq, HP, IBM, etc cannot easily replicate. The Dell sales model is compelling. Their market share continues to grow. Nobody can touch them it seems and so I wish I had some of their shares.

And maybe I have in fact let the "tax tail wag the investment dog". Not sure.

Mikale: the "January effect" reference did not register with me. What is it?


Date: 12-Oct-98 - 8:01 PM
Subject: Re: No Load Funds vs Capital Loss
From: sanchio

Thanks to all who replied. Seems to me if you have to sit out 30 days, the next 30 days may be the best time to do so, given historical October market performances.


Date: 12-Oct-98 - 9:59 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

Alternatively, sanchio, if you want to maintain your exposure to equity markets rather than be out for 30 days, you might want to consider a switch to an alternative fund. Assuming you want to maintain the current shape of your portfolio, you should then be looking for a fund that has performed similarly over the past period to the loser that you're selling.

Moreover, whether you switch funds now or whether you sell your loser now, sit it out for 30 days and repurchase it, you're still going to come up against the question of a year-end distribution, which it might be wise to skip out on. So for the sake of simplicity (and minimizing transaction costs if any are involved) you might be wise to postpone your tax-loss sale to December.

On the other hand, if the current market turmoil is driving you nuts, maybe you'd like to lighten up on equities for a little while? After all, it's your portfolio.


Date: 13-Oct-98 - 7:33 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

A related tax question:

Suppose you hold shares in the identical security in more than one (non-registered) account. Assume the adjusted cost base (ACB) for this security is different in each account. Now when you sell shares of this security out of one of the accounts do you calculate the taxable capital gain/loss based on:
(a) the ACB for the account out of which you sold the shares, or
(b) the "blended" ACB for your holdings of those shares in all accounts?

If (b), how do you compute the "blended" ACB?


Date: 13-Oct-98 - 10:03 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

Bylo, if you have a security in a corporate account, a joint account (JTWROS), and also in an individual open account, you calculate the ACB separately for each. The only time you blend the calculation is when the beneficial owner is identical in each case. So, if you held Sceptre Equity Growth with E*Trade and also with a FA, and if both accounts are registered as open in your name only...then you would combine the transactions as if it was one account for tax purposes. I've not yet run into this but I believe this to be the correct treatment.


Date: 13-Oct-98 - 10:06 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

Again, I'm no expert, Bylo, and I've never seen the question discussed, but I think it's safe to assume that the answer to your question is (b). Otherwise, there might well be tax advantages to be gained in spreading your holdings in a single fund over several accounts. So you'd calculate your ACB exactly in the same way as you would if your holdings were in a single account. Take the sum of your invested principle plus reinvested distributions and divide by total units held to get an average unit cost. Multiply by number of units sold to get the ACB for the sale -- from whichever account.

I'd also assume that one follows a similar procedure when you hold the same fund in both a taxable and registered account and are disposing of units from the taxable account.

But, then, my assumptions aren't worth much. We can only hope a bona fide accountant drops by this thread.


Date: 13-Oct-98 - 10:20 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

Thanks to both OntFA and rayw. That's what I suspected.

BTW re "I'd also assume that one follows a similar procedure when you hold the same fund in both a taxable and registered account and are disposing of units from the taxable account." It seems to me the holdings in the registered account are (a) in the name of a seperate account ("in trust for...") and (b) tax sheltered by definition, so they should not be included in the ACB.


Date: 13-Oct-98 - 10:50 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

I wonder if someone can confirm Bylo's point here concering holding of a fund in both a registered and taxable account. If he's right, I have a spreadsheet to reconstruct.


Date: 13-Oct-98 - 11:35 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

BTW, OntFA, I hadn't read your comments when I made my 10:06 posting. I don't know what tickets you hold, but when it comes to tax questions around here I consider you as "bona fide" as any accountant.


Date: 13-Oct-98 - 12:42 PM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

Thanks rayw. I am neither an accountant nor a tax expert. I consider myself to be a general practitioner (FP) who specializes in portfolio construction and income tax. But I have never taken the CICA In-Depth Tax Course, which is what would be required for one to officially boast the title of tax expert. Bear in mind that some of my answers are not always based in fact, but rather based on my knowledge of tax theory or just from memory. I usually mention something like "I'm not 100% sure but...". In any case, thanks again for the feedback.


Date: 13-Oct-98 - 2:46 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Bylo,

Following up on your related question, the ACB is the "blended" ACB of the multiple taxable accounts, INCLUDING the proportionate share of contributions (purchases + reinvested distributions) less prior redemptions to joint accounts. The purpose of including the joint account from RevCan's perspective, is the "mischief" of spousal income splitting.

Multiple personal accounts, including joint ones, are an ACB nightmare!


Date: 13-Oct-98 - 3:04 PM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

mikale, thanks for clarifying the issue of joint accounts.


Date: 13-Oct-98 - 3:05 PM
Subject: Re: No Load Funds vs Capital Loss
From: George$

Maybe I can sneak in another tax question, unrelated to the above.

My wife inherited some large-cap US shares, which are sitting at Greenline now. One of them is Ford. Recently Ford spun-off some of its assets as a separate company and issued shares in it. [The new company name escapes me at the moment.] No "cash" was received. But it seems that Greenline [for its tax reporting] is calling this a "dividend distribution" to Revenue Canada. [And we may have to pay foreign dividend tax rates.] In the Ford pre-announcement to this distribution it says that the US IRS will only require capital gains taxes payment WHEN the newly issued shares are sold. [The same as for the original Ford shares.]

Is Greenline correct? I called. They claim they are.

I view the new share distribution as a "stock split" of sorts. We now have more paper representing the same capital asset.

Bylo. I wonder if Berkshire's forthcoming amalgamation may not get caught in a similar cross-border entanglement.


Date: 13-Oct-98 - 3:36 PM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

"Multiple personal accounts, including joint ones, are an ACB nightmare!"

If you think tracking ACBs is a nightmare, what do you call it if/when a RevCan auditor takes exception with the calculation? [No, thankfully it hasn't happened to me -- yet! :-( ]

George,

1. Ford should have put the share spinoff to a shareholders' vote. Your wife should have received an information package from them that included a booklet describing the proposed deal as well as a proxy to let her vote her shares. The booklet should have a section titled something like "Tax Implications." Check this to see if it includes information about Canadian tax treatment.

2. Please elaborate on "Berkshire's forthcoming amalgamation." If you mean with GenRe, it's my understanding that (a) the deal was approved by both sets of shareholders last month and (b) it is a share swap.


Date: 13-Oct-98 - 3:49 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

I infer from your comments, Mikale, that holdings in sheltered accounts are excluded from ACB calculations on the taxable side. Thanks to you (and Bylo) for straightening me out on that point. So this evening I get to play with my spreadsheet.


Date: 13-Oct-98 - 4:01 PM
Subject: Re: No Load Funds vs Capital Loss
From: George$

Unfortunately I did not read the Ford booklet. My impression is that US Companies rarely worry about Revenue Canada.

If Greenline is correct in its "ruling" it makes me wonder whether moving US shares to a US broker [to Waterhouse from Greenline? :)] may not effectively skirt this Revenue Canada abnormality. In this case one still pays all the Can + US taxes, but in a more rational manner.[I have not yet, but I will call Revenue Canada on this.]

As I recall there will be a "new Berkshire" share after the swap with Gen Re. Given my paranoia at the moment that any paper change is excuse for a tax grab, I mentioned it. It probably is not relevant.


Date: 13-Oct-98 - 5:30 PM
Subject: Re: No Load Funds vs Capital Loss
From: George$

I think I found the answer to my asst spin-off question at Ernst & Younge. It goes as follows:

"Tax Treatment of Distributions on US Spin-Off

Q. As part of corporate restructuring, a major asset may be spun off and distributed to existing shareholders, typically in the form of a "tax-exempt" stock dividend. Where the corporation and its assets are U.S. based, the prior tax ruling by US authorities presumably is not applicable to Canadian taxpayers. How should such stock distributions be reported? To what extent, if any, can this be deemed to represent realization of accrued capital appreciation? What is the modified basis value for the original entity?

A. Under the U.S. tax Code, such a distribution is considered a dividend, however there is a specific tax deferral provision for such a transaction.

For Canadian tax purposes, the distribution is a dividend in kind, with no deferral provision. The amount of the dividend is the fair market value of the property received. There is no capital gain component associated with the dividend. The cost base of the shares on which the dividend is received is not affected. " [from E&Y]


Date: 15-Oct-98 - 11:21 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

"If/when Vanguard comes up here and I were to buy into the Canadian version of a US Vanguard fund I already own, in order to keep RevCan happy will I have to blend the ACBs or keep the two positions separate?"

It would be my initial view that if the two funds were "identical" properties, then ACB blending would be the appropriate course of action to compute tax on full or partial redemptions. I tend to think that it would be analagous to holding interlisted securities denominated in two currencies in same or another account..


Date: 22-Oct-98 - 7:34 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

If I sell a security that I hold in a non-registered account at a loss, how long do I have to wait before I can buy it back inside my RRSP? (i.e. are the two accounts considered more than an arm's length apart and thus not subject to the superficial loss rules?)


Date: 22-Oct-98 - 8:06 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Yup, superficial loss rule would not apply.

BTW, if you are "more than an arm's length apart" are you a "leg's length apart"?-:)


Date: 22-Oct-98 - 9:01 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

You be the judge...

photo courtesy Philip Greenspun


Date: 22-Oct-98 - 9:37 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

mikale, I've been under the impression that if you swap a security from an outside account into your RRSP, you were required to pay tax on any gains, but not permitted to claim a capital loss. That seemed to me to be consistent with the superficial loss rule, as I understood it. Are you saying I can sell that security and repurchase it within my RRSP while claiming the capital loss without any attention to the 30-day rule?

Bylo, you could use a shave and a haircut.


Date: 22-Oct-98 - 9:48 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

Bylo, mikale's answer sounds right in practice but the legislation is not so clear (neither is the IT Bulletin). As far as the re-purchase, the laws state that neither you, your spouse or a corporation controlled by either cannot make a purchase ... Unless there is an official interpretation (or case law) that sets some precedent, I would think a safer way to do this would be to do an IN KIND transfer of the security into your RRSP.


Date: 22-Oct-98 - 10:09 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

rayw,

That's what I'm saying. The strategy has the potential added benefit of avoiding '98 year end taxable distributions and then a possible reswap out of your RRSP in early '99. Of course, this presupposes that you are a buy and holder for that specific fund.

And now on to some

Internet Link:  TIPs for Bylo


Date: 22-Oct-98 - 10:24 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

OntFA, now I'm really going ape over this :-)

E&Y's Managing Your Personal Taxes says in section Transfer of investments to a self-administered RRSP

This transfer can be in the form of a deductible contribution-in-kind for the year or a fair market value transfer of investments to the RRSP for cash or other investments held within the RRSP. This transfer will likely result in a capital gain or loss for the individual for tax purposes. Capital losses are denied to an individual transferring investments to a self-administered RRSP, but capital gains are taxable.
That's why I asked about separate sell and buy transactions as opposed to an in specie transfer. E&Y go on to say in Capital disposition planning
The superficial loss rules may deny the capital loss if you or your spouse acquire identical investments during the period commencing 30 days prior to, and ending 30 days after, the date you or your spouse sell the investments.
So, is a SDRRSP considered to be "you or your spouse?"


Date: 22-Oct-98 - 10:26 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Nope.


Date: 22-Oct-98 - 1:24 PM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

First, thanks for correcting me on the swap issue.

mikale:

I am going to disagree with you but I can't back it up with specific references to the ITA at this time. It just seems inconsistent with other provisions of the act. Corporations are specifically mentioned in the provisions concerning superficial losses due to a control issue. Based on this, a SDRRSP should be included as equivalent to the taxpayer since the control issue. The SDRRSP is not, in itself, considered a taxpayer is it? I don't think so. But the beneficial owner (annuitant) and the individual who is in control of such account is a taxpayer - the individual. If I'm wrong, and what you say is true then what do think of this situation:

I sell Dynamic Precious Metals at a loss. Within a week, I proceed to re-purchase the same number of units of this same fund in my Dynamic RRSP (not SD). Am I denied the loss?


Date: 22-Oct-98 - 2:52 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Nope. But I'll agree to disagree.

The absurdity of the rules is that if you make an in specie transfer of a loss MF to your RRSP you are completely denied a capital loss but if you happen to be caught by the superficial loss rules (selling and rebuying) outside your RRSP you can add the superficial loss to the ACB of the repurchased fund.


Date: 22-Oct-98 - 9:33 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

I don't mean to monkey around with you, mikale, but as I'm sure you know better than I, "agreeing to disagree" doesn't go very far when you're sitting across the desk from a Revenue Canada auditor. If, as you argue, it's kosher to sell a security and immediately repurchase it within your RRSP while declaring a capital loss for tax purposes, then this seems incongruous with the Revenue Canada rules on in-kind transfers as outlined in the excerpt from E&Y quoted by Bylo. And if it's actually as straightforward as you suggest to do an end run around this Revenue Canada provision, it strikes me as rather odd it would not have been immediately advised by E&Y -- unless it was considered self-evident.

At any rate, I hope we can get some more clarity on these questions before yearend. I wonder if you could advise some further reading on the topic for the do-it-yourself accountants in the crowd.


Date: 22-Oct-98 - 10:27 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Monkey away.

Internet Link:  Contact KPMG


Date: 22-Oct-98 - 10:35 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1   Old Alias: wbaldwin@compuserve.com

I agree with Mikale, it's OK to sell the looser outside the RRSP and then repurchase it inside the RRSP (s/d or not ... see OFA example with Dynamic). However the swap from you to the RRSP is specifically denied as a way of "triggering" the loss.

It is noteworthy to recall where all such convoluted stupidity came from in our tax system: many folks trying many things and RC striving to block some of this as they go - we must also recall that it has been many years since the spectre of a true "tax loss selling" season has been seen - this next couple of months will be one for sure, the RRSP trick outlined above is fine as far as I recall (or can see) but, I have no reference to say so concretely except to argue that the loss denial on transfer to a RRSP is not a function of the "superficial loss" rule, rather it is a specific interpretation from RC on this particular stategy - so drawing a parallel in this case is misleading.

Another trick would be to have a "friendly" 3rd party (not your "spouse" due to the superficial loss rule) purchase the looser back and hold it for you for 31 days (say a brother-in-law, or your lawyer). But, a structure like this might be attacked with GAAR (General Anti-Avoidance Rule) .... which basically says that if something is technically OK, but RC just doesn't like it, they can haul the issue into court ..... sheesh.

FWIW, RC does consider an RRSP as a "separate entity" to the planholder, but in some cases the govt does look at the RRSP as the same "beneficial owner" - think of the fact that CSBs cannot be sold or transferred to anyone (except on an estate distribution) but you can transfer them in and out of your SD RRSP. However, if I own shares of XYZ in my personal portfolio and in my RRSP, the ACB on the personally held position does not consider the cost base of the RRSP shares ..... if taxes were simple, who would need consultants, eh?

How 'bout using the "superficial loss" rule BACKWARDS? Spouse A has a lot of capital gains, B has no cap gains but a big loss and perhaps even a lower tax bracket - B sells the looser, A buys the same looser WITHIN A FEW DAYS OF B's SALE (OK, now the loss is denied to B but adjusts the ACB of A's holding) .... then after say 35 days, A sells the holding triggering the full loss to offset those gains.

OK, enough scintillating clarity for now. Long day tomorrer.

Warren.


Date: 29-Oct-98 - 1:14 PM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA   Old Alias: ontfa@canada.com

I know I'm stubborn, but check out section 54 of the Income Tax Act. It has a bunch of definitions - including superficial losses. The first paragraph refers to the time period which applies. The second paragraph states that this treatment is given to the loss, if at the end of the time period (specified in the first paragraph), either the taxpayer or the spouse owns the security in any manner whatsoever. Unless there is another provision that takes precedence over this definition, it seems to me that buying a security through a RRSP account (of which you are the annuitant and beneficial owner) falls under the category of ownership in any manner whatsoever. So, where does it say (either in RC's interpretation or directly in the legislation) that this is not the case?


Date: 29-Oct-98 - 2:32 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Because the superficial loss rules were amended effective May 25, 1976. Prior to that the strategy under discussion would have been caught by the old definition which included trusts (RRSPs, DPSPs, RRIFs,etc.) as well as taxpayer, spouse and controlled corp. Read the History section of the superficial loss definition.


Date: 02-Nov-98 - 9:21 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA   Old Alias: ontfa@canada.com

mikale:

I know nobody else cares about this anymore but I just can't let anything go until I see proof. My CCH Act has alot to read on the history but it only goes as far back as 1988. Notwithstanding that here's what I found. Paragraph (b) of the Superficial Loss definition reads like this: at the end of that period [30 days either side of disposition date], the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,

Subsection 248(1) defines a person. Included in its definition (among other things) is a RRSP/RRIF trust. Subsection 251.1(1) outlines who/what are "related persons". There is no mention of any trust of any kind. So under the regulations it seems as if you can do this with a testamentary trust, an inter vivos trust, as well as other registered trusts (RESP, RRSP, RRIF, etc.).

Now, there is a provision that denies a loss on disposition to a RRSP/RRIF [paragraph 40(2)(g)]. I still would be careful about selling a security at a loss, then immediately buying it in your RRSP. This series of transactions may certainly be interpreted as being for the benefit of avoiding taxes (or realizing a tax benefit). If you're going to do this when a substantial loss is at stake, I would think most would be better off abiding by the superficial loss rules so as to better your chances of keeping the loss in the event of an audit. Thanks mikale.


Date: 02-Nov-98 - 9:38 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

Or when the auditor calls, OntFA, you could always retain Mikale to represent you. And then we know for sure who would gain the biggest benefit from your tax-loss transaction. :)


Date: 02-Nov-98 - 10:45 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Gotta think out of the box rayw!

OntFA, it is a question of statutory interpretation (which can be countermanded by the draconian GAAR at any time) and there is no specific prohibition in the ITA for the strategy under discussion. Quoting 248 when "person" is not mentioned in 54 is overreaching. The ITA specifically denied the strategy until '76, but does no longer.

BTW, rayw, completed your "revised" spreadsheets, yet-:)


Date: 03-Nov-98 - 9:34 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1

mikale, good comment on "over-reaching", thanks. This was the result of my look at the tax references as well - could not see anything that defined the s/d RRSP as a "related person" within the context of the superficial loss rules. 'Nuff said.

Warren.


Date: 04-Nov-98 - 9:44 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

mikale & Warren,

Gentlemen, thanks for your comments but I don't think I was over-reaching. I was simply checking things out for myself and I confirmed what you both said was true. I said So under the regulations it seems as if you can do this with a testamentary trust, an inter vivos trust, as well as other registered trusts (RESP, RRSP, RRIF, etc.). I simply said that this transaction is so close to the denied loss of selling a security directly to your RRSP that it may be disallowed. I don't think that's a stretch. I think it's simply prudent to warn people that yes, the laws will allow this strategy, but be very careful if you're dealing with big bucks.


Date: 04-Nov-98 - 11:04 AM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

And I'll add my thanks to OntFA, Warren, and Mikale. Special thanks to OntFA for being so "stubborn." And to Mikale for enduring my provocations.


Date: 04-Nov-98 - 9:33 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1

OFA, not YOU that was overreaching, rather the interpretation was slightly above and beyond the call, I think .... after all, no need to do Rev Can's job for them, they are aggressive enough about interpreting the rules their way .... OTOH, well said, if this was "big bucks", say a loss of $20k, then I might want to be a little more circumspect - if it was for a few thousand, I'd do it in the RRSP, no qualms. It goes without saying that anyone contemplating this should clear their own specific situation with their own tax advisor - I'm sure none of here is trying to supplant any relationships such as this.

Warren.


Date: 09-Nov-98 - 9:47 PM
Subject: Re: No Load Funds vs Capital Loss
From: Greg_B

I've read though the many posts and tried to come up with some baselines for the tax challenged like myself:-)...

All this is with the caveat: Not intended to supplant expert advice from a tax specialist with consideration to your own situation.

1) Net capital losses can be carried back three years and used against net capital gains acquired during those three years, and can be carried forward indefinitely.

2) In the course of a year if a capital gain for a fund is projected to be less then the capital loss you will incur it can be beneficial to sell the fund at a loss...(do not buy back into the fund before the annual distribution?)...I see no sense in that unless you are going to be using the loss to offset the point below; rather use it to offset the distribution? (Especially for buy and holders);

or if there has been a large capital gain with the fund during the last three years it can be beneficial to sell at a loss and claim back some of the prior years gains on which you paid taxes;

or if you decide to sell at a loss and do not want to buy back before the distribution and feel you must be in the market find a similar fund without a large projected distribution, then buy back your original fund after its distribution. (Of course you need to number crunch to see if the costs are worth it for all three points)

3) Offsetting gains with losses in the same year can prove beneficial (to reach a neutral tax point) dependant on how you feel about the markets directions or your need/want to re-balance into other investments.

4) If you made no purchases of a funds units within a 30 day period prior to the sell date the superficial loss rules do not apply and you can buy it back right away. (I saw no further defense of this position by mikale...unless I missed it) Yes or No?...Sounds to easy.

5) ABC's for multiple personal accounts are a real pain in the ass.

6) You can "sell" an unregistered investment that is in a loss position and "buy" it back immediately as a registered fund, and create a capital loss; as long as it is not a swap. This works for both RRSP's and SDRRSP's. The caveat is to use discretion if talking large dollar amounts.

I wonder how RC would react to point #6 if funds were sold, then all bought by an RRSP (not SD) that is maxed already and that person is willing to pay the 2% penalty for the few days over the 30 day allowable for $ amount and foreign content amount.

Re: the tax tail waving the investment dog...I wonder George if you would feel the same if you had crystalized your gains every year (or losses as the case may be some years) re: your comments on MFST and DELL. Just a question as it seems that buying and holding forever can place someone in the position of owing a whopping amount in unregistered investments for future years...Is it better to claim the gain every year or put it off??? I have not decided and ask all you who have walked the walk your thoughts.

There must be a better and simpler way...right mikale?

The FL continues to deliver for me...Thanks all

Perhaps one of those threads to save Bylo.

gb


Date: 10-Nov-98 - 8:14 AM
Subject: Re: No Load Funds vs Capital Loss
From: Bylo Selhi

Greg, some comments:

2) You sell at a loss in December to avoid the distribution. You buy back 30 days later to establish a lower average cost. This is not "market timing" since your intent is to buy and hold. There is a risk with this approach. If the security recovers during the 30 days "on the bench" you lose that gain.

Another variation, if you got a big distribution last year (e.g. Trimark's 25%) your book value could actually be greater than market value. In this case you can recover some of the tax you paid last year on the distribution and avoid more tax on this year's distribution.

6) The RRSP overcontribution penalty is 1% per month. AFIK most brokers check at month-end and impose the penalty if you are over your limit (+ $2K) at that point.

If you crystallise a capital gain each year you get to pay tax each year. In effect you are pre-paying the tax you would ultimately owe if you bought and held until retirement, i.e. you're loaning Canada money at no interest. I'd rather let my investment grow tax free and pay the tax only at retirement and only as I sold units of the security to meet my income requirements. OTOH if you die first your estate gets hit with a gigantic tax bill.

Yup this thread is on my "keeper" list.


Date: 10-Nov-98 - 10:46 AM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Greg: your point #4. "Stubborn" OntFA and "provocative" rayw didn't issue a challenge on that "better and simpler way" issue-:). Furthermore, there was no discussion of buying the "loser" taxable MF in the RRSP the day before selling it in the taxable account so that you are "not on the bench" for 30 days but rather fully invested at all times in that specific fund.


Date: 10-Nov-98 - 12:51 PM
Subject: Re: No Load Funds vs Capital Loss
From: Greg_B

Thanks Bylo...Re pre-paying the tax: In some cases where you know that you may want to move and rebalance a holding at some point...if you have not crystalized every year are you not letting the tax tail wag the investment dog? (holding and not crystalizing assumes that you are going to hold till retirement...not everyone does this).

Mikale...subtle but perhaps important point: Buy the holding as an RRSP the day before you sell the unregistered one. Does it matter as the conversation to this point has been sell first and buy after.

I won't challange you to clarify point #4 and get into a debate (no background to do this) but would request clarification as to it's viablility.

gb


Date: 10-Nov-98 - 1:04 PM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA   Old Alias: ontfa@canada.com

Greg:

Buy the holding as an RRSP the day before you sell the unregistered one. Does it matter as the conversation to this point has been sell first and buy after.

The issue In this case, and much of what I was questioning at first, was the issue of who buys it not when. As for the superficial loss rules what you do in your taxable account, and what you do through your RRSP, RRIF, LIRA, LIF, or any other trust is irrelevant and just does not come into play. So your RRSP could buy a capital property the day before or after you sell it at a loss in your taxable account.


Date: 10-Nov-98 - 8:53 PM
Subject: Re: No Load Funds vs Capital Loss
From: irwind

Here's a website that I've found quite useful and one that is updated frequently...

Internet Link:  Health, Wealth & Happiness


Date: 10-Nov-98 - 9:25 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1

Greg_B, you said: If you made no purchases of a funds units within a 30 day period prior to the sell date the superficial loss rules do not apply and you can buy it back right away.

Nope and Nope. Two serious errors here, first it is you, your spouse or a corp controlled by you or your spouse and also the 30-day (call it a "grace" period) applies both prior to the transacation (as you suggest) but also after the transaction. Soooo, you dfinately cannot buy it back right away and avoid the essence of the "superficial loss rule" .... as you also said, it sounds toooo easy ..... yep it was.

mikale, nice thought about the buy 1 day before the sale using the SD RRSP to make the purchase. One minor issue, I have found that clients are all to keen to exit the "dog" and then need to use the cash for the RRSP contrib to generate the cash in the account in order to fund the repurchase - a detail, true, but you like details, eh.

Warren.


Date: 13-Nov-98 - 5:00 PM
Subject: Re: No Load Funds vs Capital Loss
From: Greg_B

Thanks you all.

gb


Date: 22-Nov-98 - 4:34 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

OntFA & rayw:

Some further confirmation in support of the argument.

Internet Link:  Tax Loss Losers & RRSPs


Date: 22-Nov-98 - 4:41 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Oops..try again...

Internet Link:  http://www.eycan.com/tax/taxbag/taxbagsearch/display.cfm?Q=4


Date: 22-Nov-98 - 4:45 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

Another oops...doesn't want to link :-(

Here's the URL: http://www.eycan.com/tax/taxbag/taxbagsearch/display.cfm?Q=4


Date: 22-Nov-98 - 10:03 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1

mikale, sorry no luck with the link - went to e&y site and did a search, could you post in here the contents of the point - I'd like to see the text (or suggest a link and a few of the search criteria to use in the e&y site). TIA.

Warren.


Date: 22-Nov-98 - 10:50 PM
Subject: Re: No Load Funds vs Capital Loss
From: mikale

E&Y Tax Mailbag.

January 27, 1998.

Superficial Losses and RRSPs.

Q. The answer to the question in the January 20 Tax Mailbag suggested that the taxpayer sell the shares on the open market to realize the capital loss and use the $3,500 cash less commissions as the 1997 RRSP contribution. This is good advice. If the RRSP purchases $3,500 of the shares which the taxpayer sold within 30 days do the superficial loss rules apply?

A. The superficial loss rules apply to deny a loss from the disposition of property where an "affiliated person" acquires identical property during the period that begins 30 days before and ends 30 days after the disposition. An RRSP is a trust. Individuals and trusts are not considered to be affiliated and therefore, the superficial loss rules would not apply.

Warren, for search pathway, go to E & Y Tax, then click "search all", then click "Retirement", then click RRSPs, and then click January 27, 1998 article. Hope ya get there!


Date: 22-Nov-98 - 11:38 PM
Subject: Re: No Load Funds vs Capital Loss
From: rayw

That couldn't be more clear. Thanks, mikale.


Date: 23-Nov-98 - 9:55 AM
Subject: Re: No Load Funds vs Capital Loss
From: OntFA

I, myself, didn't need further confirmation but thanks anyway. Besides, Tim Cestnick wrote about this very issue in the G&M last Saturday.


Date: 23-Nov-98 - 9:47 PM
Subject: Re: No Load Funds vs Capital Loss
From: Warren-1

mikale, Thanks for the post - as expected it was well said. As you know, I have been a proponent of this from the outset ... nice to have some further affirmation, anyway.

Warren.

 

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