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Year-end tax tips for investors

by Wayne Cheveldayoff, 2003-09-27

For investors, tax planning should be a year-round event. It is not just for April, when tax returns must be filed.

There are several important tax-saving initiatives that must be carried out before year-end in order to get the benefit for the 2003 tax year.

Also, the months leading up to year-end are a good time to consult a tax accountant to do some serious planning, since accountants have more time for it in the fall than during the mad rush to file returns in the winter and spring.

Investors should consider the following before December 31:

· Book losses for tax purposes: Anyone with taxable capital gains this year or in the past three years should be seriously looking right now at tax-loss selling. The tax rules allow investors to carry back losses for three years. In other words, in addition to offsetting any capital gains that you may have incurred in 2003, losses booked in 2003 can be carried back to offset taxable capital gains and get a tax refund for the 2000, 2001 and 2002 tax years. If you are still hopeful about an investment on which you currently have a loss, you can sell it now and then buy it again later, as long as you wait at least 30 days before you repurchase it. If you wait less than 30 days, the tax department won’t recognize the sale. If it is a stock, it may be best to do your tax-loss selling before December to avoid the price weakness that many stocks suffer as most investors do their last-minute tax-loss selling just prior to year-end. Any losses booked in 2003 can also be carried forward indefinitely to offset capital gains in future years.

· Invest in a tax shelter: This is a tricky one and will require the help of both a tax accountant and an investment advisor. In the mining and oil and gas sectors, these shelters effectively allow investors to write-off the entire investment as an expense, usually over two years, resulting in a tax refund that puts the after-tax cost of the investment at around 50 per cent of the initial outlay. The write-off reduces the adjusted cost base of the investment to zero, so that in the future when the investment is sold, anything received back over zero would be regarded as a capital gain and taxed as such. The reason the government allows this tax break is to encourage exploration in resource development. There are similar provisions for the film industry. Investors should get the help of an investment advisor to find a suitable tax shelter, which can be so-called “flow-through shares” (the exploration expenses flow through to the investor) of a specific resource company as well as mutual funds that invest in such shares. The reason you need an experienced tax accountant is to make sure the tax shelter is sound and avoids the many pitfalls that can occur in such structured deals, especially if money is being borrowed on your behalf within the shelter. While the tax savings from these deals look good, it is important to keep in mind that there are risks, and that the courts have recently ruled that your accountant can’t be held liable for any problems or losses that occur.

· Avoid non-registered mutual fund investments: If you are thinking of investing in a mutual fund outside of a registered plan (such as an RRSP, RESP, or RRIF), hold off until the beginning of the year, unless you don’t mind being stuck with paying income tax on capital gains that you didn’t benefit from. Unfortunately, under the tax rules governing mutual fund investing, all capital gains taken within a mutual fund during 2003 will be attributed to those holding the mutual fund units at year-end. Of course, this does not apply in a registered plan where taxation is deferred until the money is withdrawn.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at

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©2003 Wayne Cheveldayoff