Topic: How To Invest

Bargain capital gains tax advice can cost you money

Capital Gains Tax

When you need tax advice, business associates and friends can be a valuable source of ideas and referrals. However, non-professionals can be mistaken or out of date in their tax knowledge, no matter how confident they seem.

This is also true of some semi-professionals—tax preparers, bookkeepers, insurance agents and so on. Court rulings or tax-department crackdowns can close tax loopholes. People sometimes get away with borderline tax maneuvers for lengthy periods, only because the tax authorities never take a close look at their affairs. But the more money you have, the more likely it is that your affairs will one day get a close look from someone at the tax department.

Then too, some maneuvers work for some taxpayers but not others, mainly because of differing circumstances.

Making an adult child co-owner of your home can have hidden capital gains tax consequences

Widowed investors sometimes try to avoid probate fees by placing an adult child on as co-owner of their homes or stock portfolios. I’m not qualified to advise anybody to go ahead and follow this plan. However, I don’t mind pointing out when I see potential pitfalls.

For one, if you have capital gains on your portfolio, you are only liable for capital gains taxes when you sell. But if you put your son or daughter on as a co-owner, the Canada Revenue Agency could interpret that as a “deemed disposition” —the sale, in other words—of half the portfolio. That would leave you liable for capital gains tax this year, rather than deferring those gains until you sell or die.

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When you die, you are deemed to have disposed of or sold your entire portfolio. But no matter how old you are, that day can still be years in the future. It’s a waste to pay capital gains tax any sooner than you have to. Worse, your stocks may have gone down by the time you die. The gain on which you’ve already paid taxes may have evaporated!

You won’t have this exact problem if you put an adult child on as co-owner of your home, since capital gains on your principal residence are tax-exempt. But each of us can only have one principal-residence capital-gains-tax exemption. If your adult child already owns a home, then any gains he or she makes on your home, after becoming joint owner, will be taxable.

In this case, putting your adult child on as co-owner of your home could convert some tax-free capital gains (in your hands) into taxable capital gains (in your child’s hands). This is likely to outweigh anything you gain by avoiding probate.

Another complication to consider: what happens if the child dies before you do? In that case, did you want to leave half your home or stock portfolio to your child’s spouse (or live-in girlfriend/boyfriend)?

Fees are just one consideration when looking for professional tax advice

Putting an adult child on as a co-owner of your property may have some tax benefits. But you need professional advice to see if it will work for you. A professional may also know of a better way (such as using corporations or trusts) to achieve your goals.

To get good tax advice at a reasonable price, you need to shop around, ask questions and check references, just as you would if you want to buy a new furnace or put an addition on your home. Just remember, good advice doesn’t come cheap. Trying to avoid the cost of good tax advice altogether can be an extremely expensive way to handle your finances.

As a member of TSI Network, you may have already seen Capital Gains Canada: 7 Secrets for Managing Your Canadian Capital Gains Tax Liabilities. If you haven’t yet read this free report, click here to download your copy today. I’d also encourage you to share the report with a friend. It’s my “thank you” just for signing up for my free daily updates.


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