2024 Federal Budget: Capital Gains Tax

Posted on April 22, 2024April 22, 2024 by [email protected]

2024 Federal Budget: Capital Gains Tax

In the 2024 federal budget unveiled on Tuesday April 16th, the Finance Minister said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 percent for corporations and trusts. Individuals will still have the 50% inclusion rate apply on capital gains of up to $250,000 annually, but will now be subject to the 2/3 inclusion rate on capital gains in excess of $250,000 per year.

While the Feds claim this will only affect less than 1% of the population, we strongly disagree. This will negatively affect all people who own corporations with investments, (including most small businesses) discourage capital investment in corporations (hurting innovation productivity and entrepreneurs, and the jobs they support), all estates (leaving less for their families and future generations), and all individuals with one-off significant tax events (who may be hard working, rather than idly rich).

Why is the change important?

The proposed 2/3 inclusion rate applies only to capital gains realized after June 25, 2024. That means there is a short time window to decide if unrealized gains should be realized now.

If you have significant capital investments (whether in a corporation, trust, or held personally), we recommend a consultation with one of our tax professionals to better understand the implications of this new policy on your investments, and discuss possible planning opportunities. Please note that these proposed policies are new and complex and we are watching it unfold. Our team will need some time to engage with more advanced commentary coming out from the government and tax community in the coming weeks before we can comprehensively consult in all circumstances.

If you have personal investments outside your RRSP or TFSA, you will want to analyze your portfolio to assess changes in taxation and strategy. For investments in an unrealized gains position, you may want to sell in advance of June 25 to take advantage of the existing lower tax rates on amounts over $250,000. You will also want to consider the timing of selling to limit gains in any one year to $250,000 to protect your gains from higher taxation. If you are in a loss, you may want to defer the losses until they are included at the higher rate.

If you hold a second property that you are looking to sell, you may want to crystallize a gain before June 25th to avoid higher taxes on the disposition of the property.

If you hold investments in a corporation that you are carrying at a gain, we want to consider the circumstances under which it would be advantageous for you to sell those investments, taking advantage of the 50% inclusion for taxes, and the 50% inclusion into your Capital Dividend Account (cash that can be paid out tax-free later).

Additionally, any corporations that are selling assets to reinvest in their business (by redistributing those funds into a different business or product line) will need to revisit planning for higher corporate tax rates on corporate investment dispositions, and we are happy to help with that forecasting.

For anyone with estate planning, we have a short window of time to consider changes required to recalibrate the tax exposure in the year of death where dispositions often exceed $250,000.

If you are concerned for your tax planning, we encourage you to reach out via email, and we look forward to helping you plan for your future.

Let’s look at the math:

Let’s say you’re a BC professional and part of your financial strategy is to create savings in your small corporation and draw down that corporate investment portfolio to fund your cost of living as needed. Following your annual income strategy, you examine your personal needs: with the increased cost of borrowing (interest) and groceries, kid camps etc you determine you need to sell part of your portfolio, which will trigger a $50,000 CAD capital gain. See below for our analysis and walkthrough. Under the current rules, we pay 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes! For someone who takes home an extra $30-35k a year…

Technical Walkthrough

Current Rules:

Under the current rules, half is taxable. And half goes to the capital dividend account (CDA), which can be withdrawn tax-free as a capital dividend. We now have $25k of tax-free gains, and $25k of taxable gains.
The taxable half is subject to two different taxes- one permanent , and the other refundable.
- On this transaction, you will pay 20% or $5,000 in permanent tax. Just like it sounds, you pay this, and you can’t get it back.
- You will also pay 30.67% or $7,667 in refundable tax. You can get this back by paying yourself a non-eligible dividend. (You recover 38.33% of the refundable tax for every dollar paid out as a non-eligible dividend.)
So far in this scenario, there has been approximately $12,667 in total taxes paid. Now, we have to get back the refundable tax.
To trigger a full refund, you need to pay a non-eligible dividend of $20,005 to get the refundable portion back ($7,667/38.33%). So, you pay out that refundable tax as part of that $20,000 dividend, and that dividend is taxed to you personally.
In BC, at the top rates, a non-eligible dividend is taxed at 48.9%. That leaves us with $10,220 after tax, plus the $25k tax-free dividend.

In the end, we triggered a $50k capital gain and you had $35,220 left after tax. That’s an effective tax rate of about 29.50% on our capital gain.

Proposed Rules*:

*note, these rules are newly released and not thoroughly communicated by the Federal Budget. Specifically Refund Dividend Tax on Hand, Alternative Minimum Tax, and the new proposals for integration under the income tax act are not clear. This is for analysis purposes only.

Under the proposed rules, instead of half of the capital gain being tax-free, now only 1/3rd of it is. This changes the outcome significantly. Now a $50,000 capital gain gives us only a $16,667 tax-free capital dividend, and we include $33,333 in corporate income.
The taxable half is subject to two different taxes- one unrecoverable, and the other recoverable.
- 20% is permanent, so $6700 tax paid
- 30.67% is refundable, and you pay $10,273 in refundable tax.
So far in this scenario, there has been approximately $16,666 in total taxes paid. Now, we have to get back the refundable tax.
To trigger a full refund, you need to pay a non-eligible dividend of $26,800 to get the refundable portion back ($10,273/38.33%). So, you pay out that refundable tax as part of that $26,800 dividend, and that dividend is taxed to you personally.
That dividend is taxed at 48.9%, leaving $13,694 after-tax, plus the $16,667 tax-free dividend.

In the end, we triggered a $50k capital gain and you had $30,194 left after tax. That’s an effective tax rate of about 39.6% on our capital gain.

Under the current rules, we paid 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes!

If you are a Metrics client and would like to book a consultation with your tax advisor, please email [email protected]. If you are not currently a Metrics client, CLICK HERE to complete our contact form for new clients.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Should you invest in an RRSP or a TFSA?

Posted on January 30, 2024February 9, 2024 by [email protected]

Should you invest in an RRSP or TFSA?

Developing a retirement savings is critical for every successful entrepreneur. It’s never too early to start saving, so here is a guide to help you understand when it is better to invest in your Registered Retirement Savings Plan (RRSP) and when you should invest in your Tax Free Savings Account (TFSA.)

Both RRSPs and TFSAs shelter you from tax as long as the investments are held within the account and stay in the account. With an RRSP, you can deduct the contribution from your income, which earns you a tax refund at your highest marginal rate, but the money becomes fully taxable at your highest marginal rate when you take it out.

The TFSA is the reverse: you don’t get a tax break on contributions, but you don’t pay tax on withdrawals either. So if you’re deciding between the two options, it’s really a question of whether to pay the taxman now or later.

In general, if you believe you are in your highest earning years, you should favour RRSP contributions, and if you believe you are in a low-earning year, contributions to your TFSA are more favourable. If you expect your income to be higher in future years than it is in this current year, you’re usually better off saving your RRSP contribution room for your higher-earning years.

The RRSP deadline is approaching (February 29, 2024) so it’s time to take action.

Still unsure which investment works best for you?

RRSP vs TFSA flowchart — Note: this flowchart contains assumptions that might not apply to your individual circumstances, is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice.

Here’s a breakdown of contribution numbers for the RRSP:

RRSP table — Note: These are just estimates. This calculation is prepared using employment income earned in B.C, and contains assumptions that may not be applicable to your individual circumstances.
*At 18% of income, max $30,780
**Refundable assuming all other income taxes paid (employment income for example)

Avoiding Over-Contributions

Over-contributing to your TFSA or RRSP can carry costly penalties, so it is important to monitor your contribution room when making deposits to these registered accounts.

TFSA and RRSP over-contributions are taxed at a penalty of 1% of the highest excess amount in the month, for each month that the excess amount stays in your account. With the RRSP, you have a cumulative lifetime over-contribution limit of $2,000 which acts as a buffer in case you accidentally exceed your limit temporarily. This buffer does not exist with the TFSA.

You can keep track of your contribution room each year by checking your Notice of Assessment (NOA) and logging in to CRA My Account online, and keeping your own running total of deposits made throughout the year.

What about the FHSA?

The First Home Savings Account (FHSA) is a relatively new registered account introduced by the federal government in 2022 that is designed to help you to save for your first home.

This account allows you to save and invest up to $8,000 per year (starting in the year you opened your account) towards your first home, and claim a tax deduction on qualifying contributions for the year of contribution, with a lifetime contribution limit of $40,000.

To withdraw your savings tax-free and make a “qualifying withdrawal”, you must be in the process of buying your first home, and meet all conditions listed by the CRA.

For more information, see our post on Understanding the First Home Savings Account (FHSA). You can also review CRA guidelines for the most up-to-date information on this account.

Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute solicitation to buy or sell any securities referred to. Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Foreign Reporting Requirements for Cryptocurrency (Form T1135)

Posted on January 17, 2024April 2, 2024 by [email protected]

Foreign Reporting Requirements for Cryptocurrency (Form T1135)

The CRA requires that individuals, corporations and certain partnerships and trusts that hold “specified foreign property” (SFP) with an aggregate cost basis of over $100,000 CAD at any time during the tax year report using form T1135 – Foreign Income Verification Statement.

Late filing of the form attracts a hefty penalty of $25 per day up to a maximum of $2,500. There CRA can also choose to assess ‘gross negligence’ penalties of $500 per month up to a maximum of $12,000 for failure to file the form.

If you hold cryptocurrency that has a cost basis of $100,000 or more, you will have to file this form with your personal tax return (T1) or corporate tax return (T2), depending on whether you own it personally or through a corporation, unless certain exceptions are met. Trusts and partnerships must also file this form, if applicable.

Is cryptocurrency considered “specified foreign property”(SFP)?

A common question from taxpayers and advisors has been – when is cryptocurrency considered to meet the definition of “specified foreign property”?

The CRA has been slow to comment on cryptocurrency taxation issues, but has provided updated guidelines for tax considerations, and has recently commented on form T1135 in response to clarifying questions posed by CPA Canada, which will be discussed further here.

Most often, taxpayers would be familiar with this form when SFP is held such as shares of foreign companies (i.e shares of publicly traded US corporations).

Included in SFP is “intangible property situated, deposited, or held outside Canada”. The CRA has commented:

“As stated in Technical Interpretation 2014-0561061E5, it is the CRA’s view that cryptocurrency (referred to at the time as “digital currency”) is funds or intangible property. As such, cryptocurrency may need to be reported on Form T1135 depending on where it is “situated, deposited or held”.”

So yes, cryptocurrency may be considered to be SFP by the CRA, and may need to be reported on form T1135.

Where is cryptocurrency situated, deposited, or held?

This has been the tricky part. Where does cryptocurrency exist? If you hold cryptocurrency in cold storage, is it situated where your hardware wallet is stored? If it is held by an intermediary such as an exchange, does the location of the exchange dictate this? What if the exchange is Canadian, but they store cryptocurrency in cold storage in another country? If that is the case, how would we know?

The fact that cryptocurrency is for lack of a better word “stored” on a blockchain argues that it can exist simultaneously in many geographical locations. So, can it arguably be ‘situated’ anywhere?

With all of this uncertainty and without going down rabbit holes of exchanges, intermediaries, nodes, and hot vs. cold storage, we have generally taken the stance as advisors that cryptocurrency is always considered to be situated, deposited, or held outside of Canada, and recommend including the cost basis of all crypto assets in determining foreign reporting requirements.

Like many complex questions regarding cryptocurrency, looking at traditional finance examples is often helpful where no guidance or legislation provides answers, which is what the CRA has done here, referring to where the shares of a corporation are ‘held’:

“…shares of a Canadian resident corporation held by a non-resident agent for the benefit of a Canadian reporting entity are considered to be intangible property situated, deposited or held outside Canada.”

So, the CRA is extrapolating that intangible property, even if it is shares of a Canadian company, if managed/held by a third party (such as an exchange), and if that third party is situated outside of Canada, the property would be SFP for the purposes of the T1135.

What about when the third party that is custodian of your crypto is a Canadian crypto exchange? The CRA commented:

“Where cryptocurrency is held through an intermediary, characterizing the relationship between that intermediary and the taxpayer may be relevant in determining whether the cryptocurrency is situated, deposited or held outside Canada. In Canada, intermediaries that wish to offer crypto assets services to Canadian clients must comply with guidelines issued by the Canadian Securities Administrators (“CSA”) – referred to by the CSA as “crypto trading platforms” or “CTPs”. While the determination of where cryptocurrency is “situated, deposited or held” is a question of fact that can only be determined after a review of all the documents and the circumstances applicable to a particular situation, it is our view that, where CTPs are resident in Canada and comply with Canadian regulations, cryptocurrency held through such CTPs for the benefit of Canadian clients will typically not be considered as “situated, deposited or held” outside Canada.”

We find this a bit too ambiguous to comfortably determine what portions of a taxpayer’s cryptocurrency holdings would fit into these parameters. It could be argued based on this CRA comment that if all of your crypto holdings are in a compliant, Canadian CTP, and you hold no other SFP, then you would not need to file form T1135.

Barring unique situations, we still recommend that all cryptocurrency holdings be included in the consideration for the total cost basis of SFP.

Capital vs. Inventory

There is a common ‘carve-out’ rule that excludes cryptocurrency and other property from being considered SFP. If the property is used or held exclusively in an ‘active business’, then it is not included in specified foreign property.

The distinction of capital property vs. inventory is important for those trading cryptocurrency, either as an individual or a corporation. There are several determining factors to consider whether trading activity is capital in nature, or constitutes an active business (again, this is out of scope for this discussion).

In short – assuming that ‘day-traders’ of cryptocurrency are carrying on an active business (this is complicated and requires analysis to determine), the cryptocurrency held is considered inventory of the active business, and is not required to be reported for the purposes of form T1135. Note: there may be situations where some property held is inventory in active business and some is capital property.

This would likely not apply to holders that have purchased cryptocurrency over time, with the intention of holding for appreciation in value over the long-term and/or receiving staking rewards. This situation better reflects that of a traditional stock investor, and would likely be considered capital property for taxation purposes and included as SFP for form T1135.

The CRA also commented on whether crypto held in an “adventure in the nature of trade” would be considered inventory held in an active business. This would be applicable in a case where someone who has never dabbled in cryptocurrency decides there is an opportunity for a quick flip for profit and, say, purchases a bunch of BTC, and sells the next day for a substantial profit.

This is likely not a capital transaction, but also per the CRA comments, does not constitute carrying on an active business. This would be an adventure in the nature of trade. Therefore, if at one point in the year, the person in this example held BTC with a cost basis of $150,000, and sold it the next day, they would be required to file form T1135 in that year:

“…although an adventure or concern in the nature of trade is included in the definition of the term “business” in section 248, it does not necessarily mean that a taxpayer who is engaged in an adventure or concern in the nature of trade is “carrying on” a business or has “carried on” a business. Where it is established that property such as cryptocurrency or NFTs are held or used in an adventure in the nature of trade, CRA will consider that such property is not held or used “in the course of carrying on an active business” for purposes of applying paragraph (j) of the definition of “specified foreign property” in subsection 233.3(1) of the Act. As such the exclusion provided in that paragraph would not be applicable with respect to the property.”

T1135 Filing Due Date

The due date for filing form T1135 is the same date as income tax returns for individuals, corporations and trusts and the same date as the partnership information return for partnerships. See HERE for dates.

If you need help navigating cryptocurrency taxation and reporting, you can CLICK HERE to book a consultation with our team.

Introducing the Metrics Education Series

Posted on September 11, 2023September 15, 2023 by [email protected]

Introducing the Metrics Education Series

It’s back to school time and as lovers of education, we are eager to announce our new Metrics Education Series! Every Wednesday for the next four weeks, we will be hosting an online, real-time education session with one of our professionals. Through this series, we aim to provide value-added education services exclusively for our clients and free of charge.

Our aim is to provide our clients with education, insights and knowledge in the realms of tax planning and business intelligence, enabling them to make higher quality decisions that shape the future of their business.

Series 1: Finance for CEO’s

Hosted by Regan McGrath CPA, CA
Regan McGrath is the founding partner and CEO of Metrics Chartered Professional Accounting where she has grown the firm into a national leader in the cryptocurrency space and leads the CFO services business.

In this two part series, Regan McGrath CPA will teach an introduction to finance for CEO’s covering the following topics:

Financial Literacy: How to read financial statements.
Financial Ratios and Key Metrics: What they are, and what they mean.
Becoming a Data-Driven CEO: Using real-time data to become a better CEO.
Cap Tables: What they mean, and how to read them.
Financial Storytelling: Ensuring your pitch matches your financial model.
Top 10 CEO Questions: The top 10 questions CEO’s ask their CFO/tax accountant.

This series will be taught over two sessions via Google Meet on Wednesday, September 13 and Wednesday, October 4, from 12:00 – 1:00 p.m. (PST).

Series 2: Tax Planning Opportunities

Hosted by Sulaiman Mirani CPA
Sully is the Senior Tax Manager at Metrics with a wealth of experience in tax planning and financial advisory. He has worked with clients across various industries providing strategic tax solutions to help businesses achieve their present and future goals.

Sully will teach an introduction to tax planning opportunities aimed at business owners, investors or individuals thinking of incorporating. Topics include:
The use of a corporation.
Adding a holding company vs having a sister company.
Family Trusts.
Purification of a company.
Taking out funds from your corporation:
- Salary vs Dividends.
- Dividends vs. Pref Gains.
- CDA’s: The Capital Dividend Account.

This series will be taught over two sessions via Google Meet on Wednesday, September 20 and Wednesday, September 27, from 12:00 – 1:00 p.m. (PST).

If you are a Metrics client, you will have received an invitation to join these sessions via email. If you have not received this email, please contact [email protected]

If you are not a Metrics client but would like to discuss tax planning opportunities for your business, you can CLICK HERE to contact us and book an introductory meeting with our team.

Why Incorporate Your Professional Practice?

Posted on July 27, 2023October 12, 2023 by [email protected]

Why Incorporate Your Professional Practice?

A professional corporation is used when individuals run their own practice and wish to provide their professional services through a corporation for the reasons mentioned in this article.

Incorporating your practice has many advantages; the main one is being able to defer your taxes. A corporation becomes useful when your earnings exceed your living requirements in a year.

Canadian taxes use a marginal rates system. As your personal income increases, so do the tax rates, resulting in higher taxes on higher income. The top tax bracket in British Columbia is 53.5%. The corporation tax rates are 11% on the first $500,000 and 27% beyond that.

For example, assume you earn $250,000 personally in a year but only require $100,000 to live. You then have $150,000 in excess earnings on which you pay personal income taxes. Your personal tax rate would generally be higher than that of a corporation. With the use of a corporation, the excess of $150,000 can remain in the corporation.

Though the corporation is subject to tax, the tax rates are significantly lower. In the example above, you can defer more than $45,000 in taxes annually. These savings can then be reinvested in your business or saved for retirement. The compounded savings can go a long way, making it clear why incorporating is an optimal approach.

Another benefit comes into play when you are purchasing a practice (ex. dental practice) through financing. The loan repayment becomes more tax efficient when done through a corporation. As the corporate tax rates are lower, you are left with more after-tax money that can be used to repay the loan more quickly.

Liability in a Corporation

Having a corporation in place provides an added layer of security against personal liability. It makes it more difficult for someone to go after personal assets if the business defaults on its debts. However, it is important to know that professional liability is not limited in any way by practicing within a corporation.

Income Splitting (TOSI)

In 2018, the federal government introduced new rules to deter business owners from splitting income with their family members, and Tax on Split Income (TOSI) was introduced. TOSI taxes the split income the family member receives at the highest tax rate unless an exception applies.

Interest or dividends from a public corporation or mutual fund corporation (investment portfolio) may be split without the application of TOSI. We recommend you discuss this with us before you pay dividends to your family to see if you fall within any exceptions.

Lifetime Capital Gains Exemption (LCGE)

Where your practice can be sold, or the shares of the corporation can be sold, a corporate structure will allow for the use of the lifetime capital gains exemption. This is a common tax plan for retiring professionals who can sell their practice.

The lifetime capital gains exemption allows each individual shareholder who is selling their shares to shelter the first $971,190 (for 2023 – indexed each year) of capital gains from tax. That means the first $971,190 of capital gains will be tax-free.

The lifetime capital gains exemption is available to each taxpayer. This means that on the sale of your practice, the lifetime capital gains exemption may be multiplied by including your spouse, children, and parents as shareholders of the corporation (subject to your college’s by-laws).

To qualify for the lifetime capital gains exemption, the shares of the corporation must be of a Qualified Small Business Corporation (QSBC). Various conditions must be satisfied to meet the qualification. The Small Business Corporation must be carrying on an active business and:

It must be a Canadian company controlled by Canadians (at least 50% Canadian ownership);
it must be a privately owned company (not publicly traded);
at the point in time of disposition of the shares, 90% of the fair market value of the assets of the company must be used by it, or by a company owned by it, in an active business carried on in Canada;
for the 24-month period prior to any sale of the shares, the fair market value of the assets used in the active business of the company must be at least 50% of the total fair market value of the assets; and
where there are holding companies or numerous operating companies, the qualifying assets in each company must meet certain percentage tests for use in an active business.

One thing to watch out for is when your investments portfolio, excess cash, or assets not used in your active business grow beyond the qualifications stated above. When your corporation is in such a position, we have a remedy.

Professional Services through a Partnership

If you offer your professional services through a partnership, you can also hold your partnership interest through your corporation. By holding your partnership interest through a corporation, you are able to defer taxes and possibly get the lifetime capital gains exemption as discussed above. Generally, the rollover of partnership interest into your corporation can be done on a tax deferred basis as well.

Purifying and Creditor Proofing

We may be able to solve the issues mentioned above by “purifying” the professional corporation and moving the inactive assets into a holding company on a tax-deferred basis. This results in the assets to be held by another corporation and not your professional corporation. In addition to bringing your corporation on-side to be able to use your LCGE, this plan also aids with creditor proofing.

If you are interested in learning more about incorporating a professional practice, or how we can optimize your existing corporation, book a consultation with our team.

Tax Loss Selling (updated for 2023)

Posted on December 15, 2021December 8, 2023 by Oliver Nelson

Tax Loss Selling (updated for 2023)

‘Tis the season for tax loss selling

To ensure you are efficiently planning for the 2023 year end, we recommend reviewing your investment positions before the end of the year. If you have realized any capital gains from the sale of securities in non-registered accounts or from the sale of cryptocurrencies on account of capital, you might want to consider the strategy of tax loss selling (or selling your ‘losing’ positions to offset some of the gains).

The gist

Selling loss positions allows you to realize that loss in your portfolio. This is called a capital loss. These losses are tax assets as they offset capital gains in your portfolio (capital gains can only be reduced by capital losses).

If you have realized gains in the last three years (the limit on carrying back capital losses to apply against capital gains), selling losing positions before the end of 2023 will allow you to carry back the loss to one of the previous three years, resulting in a refund on the tax paid relative to the losses carried back. If you have capital gains realized in 2020, this is the last year to carry back losses and get refunded some of the tax you paid on those gains. You can carry forward capital losses from prior years indefinitely.

If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing.

Examples of tax loss selling

EXAMPLE 1: Current year gains and current year losses:

You have realized gains on the sale of some ETH of $50,000 in the current year. You also hold a position in a crypto project DOG that dropped in value during the year from $60,000 at cost down to $10,000, its current fair market value. Selling the DOG position at a $50,000 loss will fully offset the $50,000 gain realized earlier in the year from ETH.

This is a simple example that would be advisable if you felt the losing position was a lost cause and wanted to exit the position regardless. Other considerations here would be gas fees to exit the losing position. If the offsetting loss were much less and the benefit would be lost to gas fees, it would not be worth it to exit the position.

EXAMPLE 2: Prior year gains and current year losses:

You sold some shares of AAPL at a gain of $30,000 in 2021. Your investment advisor recommends “balancing” your portfolio according to your risk tolerance and long-term plan, and exiting certain positions. Any losses from the rebalancing can be carried back to 2021 to offset the gains from AAPL in that year, resulting in a refund of some of the tax paid in 2021.

Traps to avoid

Superficial loss rules

If you were to attempt to crystallize losses by selling a security or cryptocurrency, but then want to reenter the position, you must wait 30 days from the sale to the next purchase, otherwise you will be caught by the superficial loss rules. If a superficial loss is reported, the loss will be denied for tax purposes and will be added to the cost basis of the new position, effectively negating any tax benefit until you exit the new position. These rules apply to assets repurchased within 30 days be any “affiliated person” (spouses/common law partners, corporations controlled by you or a spouse, or trusts in which you or your spouse are a beneficiary).

EXAMPLE 3: Superficial losses:

On December 19th, 2023 you sold all your position in ETH which had a cost of $10,000 for $6,000 triggering a capital loss of $4,000. On Jan 2, 2024, you repurchased the same amount of ETH back for $6,000. As you repurchased the ETH back within 30 day, the superficial losses rules will deem your loss in 2023 to be NIL and the cost base of the repurchased back to $10,000 ($6,000 cost + $4,000 of superficial losses).

Identical Property

The superficial losses apply even if you buy an identical property. Generally, properties are identical if they are the same in material respects, and general buyers would not prefer one property to the other. A common example is buying shares of a corporation vs units of a mutual fund trust are viewed as identical properties.

Registered accounts

Losses from transferring securities to a registered account (RRSP, TFSA, etc) are denied under the Tax Act. If you wish to transfer an asset from a non-registered account to a registered one, it is best to sell the security and realize the loss in the non-registered account (allowing for the loss to be applied against gains), then waiting the 30 days to repurchase the asset in your registered account to avoid the superficial loss rules.

Foreign exchange

A position in a US security may be in a loss relative to the USD cost basis and the current USD fair market value, however depending on the exchange rate, the position could potentially be flipped into a gain position. Be sure to translate both the cost basis in CAD, and the expected proceeds in CAD to determine whether a US denominated security is truly in a loss position.

The Skinny

If you have losers in your portfolio and gains that have been realized, the settlement date of the sale of the losers must be before December 31, 2023 to fully realize the losses for tax purposes. If you have a portfolio with gains in any of the past three years, it may be beneficial to dump some of your ‘loser’ assets to reduce your taxes owing. It literally turns a loser into a tax asset. Something from nothing- that feels more like the holiday spirit.

Understanding the First Home Savings Account (FHSA)

Posted on February 9, 2024February 11, 2024 by [email protected]

Understanding the First Home Savings Account (FHSA)

The First Home Savings Account (FHSA), introduced by the federal government in 2022 and rolled out by financial institutions from 2023, is designed to help pave the way for homeownership by introducing additional tax savings for those who are saving for their very first home. Much like the Registered Retirement Savings Plan (RRSP), the FHSA allows for deductions on your income tax and benefit return for the year of contribution or subsequent years. The FHSA is registered to an individual’s CRA account, so spouses can each open an account and have access to their own personal contribution room.

Savings can be invested in the FHSA, either in a managed or self-directed account, and any gains or interest will remain tax-free as long as you can make a qualifying withdrawal (if you do not qualify when withdrawing, you will need to pay tax on those gains). Generally, the types of investments that qualify are the same as those permitted in a RRSP and TFSA, including shares in publicly traded companies, government and corporate bonds, GIC’s, ETFs and mutual funds. If the funds are for your down payment and you need to limit risk exposure, in some accounts you can leave it as cash and just earn regular interest (FHSA products vary between providers).

Who can open a FHSA Account?

The FHSA is not for existing homeowners, and you need to meet the following conditions to qualify to open a FHSA:

You are between 18* and 71 years old as of the December 31 on the year you open the FHSA
You are a resident of Canada for tax purposes (if you are unsure, see our blog post on determining your Canadian residency status)
You did not live in a qualifying home** (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned in this calendar year (or owned by a spouse or common-law partner), in the current calendar year or the previous 4 calendar years.

*In certain provinces and territories, the legal age at which an individual can enter into a contract (which includes opening an FHSA) is 19 years old. This includes British Columbia, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Nunavut, and Yukon.

**Qualifying homes include Single-family homes, Semi-detached homes, Townhouses, Mobile homes, Condominium units, Apartments in duplexes, triplexes, fourplexes, or apartment buildings, A share in a co-operative housing corporation that entitles you to own and gives you an equity interest in a housing unit. It does not include a share that only provides you with a right to tenancy in the housing unit

Contribution Limits and Carry-forwards

Your contribution room begins to accumulate the year the account is opened. If there is no account opened, you do not accumulate contribution room.

The contribution limit for the FHSA increases by $8,000 for each calendar year your first account is open, and the lifetime FHSA deduction limit is capped at $40,000. Contributions, including transfers from RRSPs, contribute to determining the deductible amount over your lifetime.

The carry-forward room is capped at $8,000, so if you don’t contribute for 2 years, you do not get $16,000 carry-forward.

Over-contributions are taxed 1% per month so it’s important to keep track of your deposits and contribution room.

How It Works with Tax Deductions

Contributions made to FHSAs may be deductible for the year of contribution or subsequent years. Calculating the maximum deductible amount involves filing your income tax and benefit return for the year you initiated your FHSA. Any unused contributions are carried forward, with the cumulative amount reflected on subsequent notices of assessment or reassessment.

Your FHSA provider (financial institution the account is held with) should provide you with a T4FHSA Information Slip by February 28th (or 29th) of each year, summarizing your deductible contributions for the previous year. Upload this slip to your Metrics folder (#FilesYouWantMetricsToSee).

Making a Qualifying Withdrawal

So you’ve signed a purchase agreement for your first home and need the funds for your down payment (or perhaps you need it for closing costs or some new furniture). To avoid owing tax on your contribution when you withdraw your money, you must make a “Qualifying Withdrawal” by meeting the following criteria from CRA:

You must be a first-time home buyer for the purposes of making a withdrawal
- This means you did not live in a qualifying home (or what would be a qualifying home if located in Canada) as your principal place of residence that you owned or jointly owned at any time in the current calendar year before the withdrawal (except the 30 days immediately before the withdrawal) or the previous 4 calendar years
- A “first-time home buyer” for the purpose of making a qualifying withdrawal is different from a “first-time home buyer” for the purpose of opening an FHSA.
You must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal;
You must not have acquired the qualifying home more than 30 days before making the withdrawal (so you have 30 days after closing to withdraw all of your funds).
You must be a resident of Canada from the time that you make your first qualifying withdrawal from one of your FHSAs until the earlier of the acquisition of the qualifying home, or the date of your death.
You must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it.
You must fill out Form RC725 Request to Make a Qualifying Withdrawal from your FHSA and give it to your FHSA issuer. Some FHSA issuers such as Wealthsimple will generate this on your behalf during the withdrawal process, after confirming with you that you meet the criteria.

Some other points we noted about the FHSA

You can use this and the Home Buyers Plan (HBP) at the same time.
Just like the HBP, there is no need to provide proof of expenses for the funds. WHAT you use the money for is not important, so long as you respect the criterias around buying a home.
It’s only for a principal residence you plan to occupy, not for revenue generating properties or secondary residence.
The contributions done in the first 60 days of the year are not deductible for the previous year like RRSP contributions are.
If you over-contribute from an RRSP transfer to your FHSA, you can transfer those funds back to your RRSP tax-free to avoid the tax. However this would be inefficient as you cannot claim the deduction on an over-contribution, and this transfer would not count as an RRSP contribution.
Just like RRSPs, you don’t have to deduct the contribution the year you make it. You can wait for a year with higher income.
If you don’t make a qualifying home purchase within 15 years of opening the account, the funds are transferred to your RRSP without impacting contribution room.

In summary, the FHSA is an account that should not be ignored if you are saving for your first home, as it can unlock significant tax refunds for the years you contribute, as long as you are using the account as it is intended to be used and expect to make a qualifying withdrawal in the future. For more information, you can review up-to-date CRA guidelines or get in touch with your tax advisor.