My wife and I are in the early 1970s and have significant unrealized capital gains in our joint investment account. Is it advisable for us to cash in our winnings now and pay tax, or should we wait until we both die, when others will? The purpose of the sale now would be to minimize the significant amount that the Canada Revenue Agency will demand from the executor of our estate. We would then reinvest the net proceeds in similar dividend paying stocks to continue to fund our retirement lifestyle. We could repeat this exercise in 20 years if luck is still on our side.
I can understand why you might see some interest in triggering capital gains now instead of waiting for you to go. Even though only half of capital gains are currently included in income, your estate could end up paying a large chunk of tax at your highest marginal rate if all of your accrued gains end up on your return at the same time. final income.
However, in most cases it is always better to wait.
“That’s a classic question,” said Jamie Golombek, head of tax and estate planning at CIBC Private Wealth, in an email.
“The short answer is that it rarely makes sense, for tax reasons alone, to crystallize capital gains and voluntarily pay taxes today, rather than paying them later – especially if your intention is simply to redeem. the same actions. “
There are several reasons why the wait might be more beneficial. A key consideration is that, depending on how long you and your spouse live, it could be decades before the earnings in your portfolio are taxed.
When a person dies, the “deemed disposition” rules in the Income Tax Act treat the person’s property as if it had been sold and the capital gains realized. However, couples benefit from a break in this regard: if the shares are bequeathed to a surviving spouse or partner, the latter can become the owner of the assets at their original cost base, which defers the capital gain until the end of the period. ” on the death of the spouse or sells the shares.
“So unless you need the capital from the sale of the stocks to fund your retirement lifestyle (rather than living off the dividend income from those stocks), defer realizing the capital gains for that long. as possible may make sense – assuming you are comfortable with the stock selection itself, ”Mr. Golombek said.
It is also important to consider the potential reduction in government benefits if you were to realize capital gains, which would increase your income during your lifetime.
“You really need to compare your effective marginal tax rate today to the expected rate in the year of death, bearing in mind that if you realize capital gains in a particular tax year, it may result in loss of income-tested benefits. – like Old Age Security, Guaranteed Income Supplement or the Age Amount Credit – during those years, which could result in a higher effective marginal tax rate, ”Mr. Golombek.
Another important consideration is that if you trigger capital gains early and pay tax, you will have less net capital available to invest, potentially for many years. This will not only reduce your dividend income during your lifetime, but it will also most likely reduce the growth of your portfolio and the eventual value of your estate.
Whether the tax savings will make up for the lost investment opportunity depends on many factors, including your current and future tax rates, the rate of return on your portfolio, and the lifespan of you and your wife. , said Golombek. 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 calculate the numbers based on your age, income, rates of return, size of estate, health, and expected longevity. to see if paying taxes prematurely makes sense for you.
“In my experience, this is rarely the case,” he said.
I have considered simplifying my portfolio by reducing the number of stocks I own and switching to more exchange traded funds. I’ve looked at several of them, like iShares Core Growth ETF Portfolio (XGRO), BMO Growth ETF (ZGRO), and Horizons Growth TRI ETF Portfolio (HGRO), each of which is essentially a “fund of funds”. The management expense ratio quoted for these ETFs is quite low, but I wonder if the figure quoted also takes into account the MERs of the underlying funds.
When you invest in an ETF that owns other ETFs, you only pay the MER of the fund that you own directly. Securities laws prohibit fund companies from doubling expenses.
For example, XGRO owns eight other equity and bond index ETFs, with MERs ranging from 0.03% to 0.22%. You would only pay XGRO’s MER of 0.20%, which includes the annual management fee of the fund, administration fees, marketing, taxes and other expenses.
Email your questions to [email protected]. I am not able to respond to e-mails personally, but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investment information delivered straight to your inbox three times a week with the Globe Investor newsletter. register today.