Building your Financial
Success
With Alain Aube
Tax Planning
Tax prep tips for your investment portfolio
(Spring 2005)
Each year at this time, most tax-paying Canadians wonder which
expenses are legitimate tax deductions and which ones are not. For
investors, those decisions can be even more complex. To help you out,
here are some tax tips relating to your investment portfolio that may
save you time, sweat and tax dollars:
Loan interest
Under current federal rules, interest is generally deductible if the
loan was used to buy an investment that has the prospect of producing
some income. So, if you borrow money to buy shares in a Canadian company
or a mutual fund, the interest you pay is deductible (special rules
apply in Quebec). Interest on loans taken out for personal purposes -
such as to purchase a home, make an RRSP contribution, or purchase a
boat- is not deductible. With the help of your financial planner and tax
advisor you may be able to rearrange your debt to maximize the tax
deduction.
Even though RRSP loans are not deductible, borrowing funds for your RRSP
contribution can make sense. You'll get an immediate tax reduction for
your contribution along with more money growing in the tax-deferred
environment of your RRSP, and you can use your extra tax refund to pay
down the loan - that's a win-win-win situation.
Fees and other expenses related to your investments.
As an investor, you are allowed to deduct certain "reasonable"
investment-related expenses if they were incurred for the purpose of
earning income. These can include:
- Fees for the management or safe
custody of investments, such as safety deposit box charges.
- Fees on "wrap" accounts and investment
counsel fees. A wrap account is a form of "all-in-one" managed
investment fund that combines commissions and management costs into
one fee based on the value of assets in the plan.
- Accounting fees incurred in
conjunction with accounting for investment income can also be
deducted.
However, these fees and expenses are
generally not deductible for investors:
- Fees or commissions paid to
stockbrokers for trades are not deductible. These fees and any other
amounts incurred in the purchase or sale of securities that are
"capital property" are reflected in the Adjusted Cost Base or proceeds
of disposition (ACB) of those securities and included in the
determination of the capital gain or loss when you sell the
securities. (Generally speaking, the Adjusted Cost Base is the cost of
a property plus any expenses to acquire it, such as commissions or
legal fees. To calculate a capital gain or loss, you subtract the
total of your property's ACB from the proceeds of disposition.)
- Legal fees are generally not
deductible unless incurred to produce income. When incurred for the
purchase or sale of shares held as capital property they may be
included as a component of the ACB of the shares or deducted from the
sale proceeds as disposal costs.
- Mutual fund management fees are not
deductible because they have already been deducted at the fund level
in determining any taxable distributions.
Foreign exchange gains and losses.
These are generally recognized only when realized. For example, when you
sell a US stock, use the exchange rate on the date of purchase (or the
average for the year) to determine its ACB and the exchange rate at the
date of sale to report the proceeds of sale in determining your capital
gain or loss.
If you earned a significant amount of highly-taxed income on your
non-registered investments, this is an ideal time to review the makeup
of your portfolio. A professional financial advisor may be able to
suggest strategies to make it more tax efficient while keeping the level
of risk suitable to you.
This column, written and published
by Investors Group Financial Services Inc., is presented as a general
source of information only and is not intended as a solicitation to buy
or sell investments, nor is it intended to provide professional advice
including, without limitation, investment, financial, legal, accounting
or tax advice. For more information on this topic or on any other
investment or financial matters, please contact your Investors Group
Consultant.
