My wife and I are in our early 70s and have significant unrealized capital gains in our joint investment account. Is it fair for us to cash our profits now and pay taxes, or should we wait until we both die, when others will do it for us? The purpose of selling now will be to reduce the significant amount that the Canada Revenue Agency will demand from the executor of our property. We will then reinvest the net proceeds in similar dividend-paying stocks to continue funding our retirement lifestyle. If luck is still with us we can repeat this exercise again in 20 years.
I can understand why you might see some merit in triggering a capital gain now rather than waiting until you’re gone. Even though only half of the capital gains are currently included in income, your estate could potentially pay a substantial portion of tax at your highest marginal rate if all of your accumulated gains appear on your final tax return at once.
However, in most cases, it is still better to wait.
“It’s a classic question,” said Jamie Golombek, head of tax and estate planning with CIBC Private Wealth in an e-mail.
“The short answer is that it rarely makes sense to crystallize capital gains for tax reasons and pay the tax voluntarily, versus paying it down the road – especially if your intention is to simply buy back the same stock.” of.”
There are many reasons why waiting may be more beneficial. An important consideration is that, depending on how long you and your spouse live, gains in your portfolio could take decades to become taxed.
When someone dies, the “Deemed Disposal” rules of the Income Tax Act treat the person’s assets as if they were sold and capital gains were received. However, couples get a break in this regard: If the shares are left to the surviving spouse or partner, he or she can take ownership of the asset at its original cost basis, which prevents capital gains until That the husband or wife does not die or sell the shares. .
“Therefore, unless you need capital from the sale of shares to fund your retirement lifestyle (versus living on dividend income from those stocks), it makes sense to defer capital gains gains for as long as possible. Comes — assuming you’re comfortable with stock selection,” Mr. Golombek said.
If you want to trigger capital gains, it’s also important to consider the potential reduction in government benefits, which will increase your income while you’re alive.
“You really need to compare your marginal effective tax rate today with the expected rate in the year of death, taking into account the fact that if you realize a capital gain in a particular tax year, it will result in income There could be a loss of -tested benefits – such as Old Age Protection, Guaranteed Income Supplement or Age Amount Credit – in those years, which could result in a higher marginal effective tax rate,” Mr. Golombek said.
Another important consideration is that, if you trigger capital gains early and pay taxes, you will have less net capital available to invest, potentially for many years. This will not only cut into your dividend income while you are alive, but will also reduce the growth of your portfolio and the eventual value of your assets.
Whether or not there will be tax savings to make up for a lost investment opportunity depends on several factors, including your current and future tax rates, your portfolio’s rate of return, and how long you and your wife live, Mr. Golombek said. . Any increase in the capital gains inclusion rate – which was one of the New Democratic Party’s campaign proposals – would also be included in the decision.
Mr. Golombek suggests that you meet with a financial professional who can crunch the numbers based on your age, income, rates of return, your asset size, health, and projected longevity to see if it’s premature. It makes sense for you to pay some tax.
“In my experience, this rarely happens,” he said.
I am looking to simplify my portfolio by reducing the number of stocks I own and transitioning to more exchange-traded funds. I’ve looked at several, such as the iShares Core Growth ETF Portfolio (XGRO), the BMO Growth ETF (ZGRO), and the Horizons Growth TRI ETF Portfolio (HGRO), each of which is essentially a “Fund of Funds.” The quoted management expense ratio for these ETFs is fairly low, but I wonder if the quoted figures also account for the underlying fund’s MER?
When you invest in an ETF that contains other ETFs, you pay directly the MER of the fund that you own. Securities laws prevent fund companies from double-dipping on expenses.
As an example, XGRO has eight other stock and bond index ETFs, with MERs ranging from 0.03 percent to 0.22 percent. You will only pay your MER of 0.20 percent of XGRO, which includes the fund’s annual management fee, administrative costs, marketing, taxes and other expenses.
e-mail your questions [email protected]. I am not able to answer e-mails personally, but I do select a few questions to answer in my column.
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