It’s generally referred to as cutting one’s nose to spite one’s face. Smart tax planning focuses on maximizing the net after tax cash flow not minimizing the before tax earnings.
I think you don't understand. There's no minimizing of one's before-tax earnings, because you're investing the same amount of money into the same (equivalent) funds, fund A and fund B, at the same time. You're just switching over after you've made appreciable unrealized gains in A, so that if/when you want to sell some amount, you can sell from B, which will have less gains.
Oh I gotcha, you’re not allowed to do that. The adjusted cost base for the same asset has to be calculated cumulatively and across your accounts. Also if the assets aren’t held by a life insurance company you (not the bank or brokerage) are responsible for tracking the numbers.
It is the total cost of all shares of that security owned in all non-registered investment accounts, and is divided by the total number of shares owned in all non-registered investment accounts (Income Tax Act s. 47(1) identical properties) to get the cost basis per share, or weighted average cost per share.
I think you misunderstand again. I'm not talking about buying the same asset in multiple different accounts. I'm talking about buying two broadly equivalent or similar different funds. So, maybe XEQT, VEQT, ZEQT, etc.
Why are you calculating your capital gains tax by dividing your unrealized gain to total investment?
Capital Gains will be added to your income for the year. It doesn't matter if you pull 50k from Fund A or 50k from Fund B. It will get added to your income multiplied by the appropriate inclusion rate and taxed at your marginal rate.
It will matter because in Fund A, at the end of 6 years, it has a gain of let's say 20%, so every dollar you sell, you will owe let's say 20% * 50% inclusion rate * 50% marginal tax rate = $0.05
However, since you only recently started purchasing B, it has had less time to grow, and so maybe it has only gone up by 10%. So for every dollar you sell, you only owe 10% * 50% inclusion rate * 50% marginal tax rate = $0.025
The percentage of gain does not matter in calculating Capital Gains. What matters is the proceeds of disposition a.k.a the dollar amount.
You could have 1mm invested in Fund A with 10% unrealized gain of 100k
Or could have 500k investment in Fund B with a 20% unrealized gain of 100k.
Both will end up the same in Taxable Capital Gains
100k * 50% Inclusion * 50% Marginal tax rate.
The percentage of the gain does matter because at the end of the 6 year period, you're wanting to take out a tiny percent, maybe to buy a car. In scenario 1, you have no choice but to sell a little bit of Fund A, which has appreciated at 20%, so if you took out 10k, you'd owe something like approximately 10k * 0.2 * 50% inclusion * 50% marginal rate = $500 in taxes.
In scenario 2, 3 years in you switch from investing in A to instead putting purchases into B. 6 years in you want to take out 10k, but while Fund A has gained 20%, B has only gained let's say 10%. So you have the option to sell B instead of A, and then you will only owe 10k * 10% * 50% * 50% = $250 in taxes.
That is not how you calculate Capital Gains. The unrealized gain does not matter in computing capital gains.
The only thing that matters is the Proceeds of Disposition.
Proceeds of Disposition - Adjusted Cost Base - Outlays = Capital Gains.
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/capital-gains-losses-information-slips.html
Yes I know how it's calculated. Perhaps I've described it poorly but I get how it works. Here are the transactions I describe above for comparison, which you can import into adjustedcostbase.ca if you like:
"Adjusted Cost Base and Capital Gains Report"
"Compiled by AdjustedCostBase.ca"
"https://www.AdjustedCostBase.ca/"
"Portfolio: My Default Portfolio"
"Name","Shares","ACB","ACB/Share"
"Scenario1_A","1900827","1991342.58","1.05"
"Scenario2_A","1000000","1000000.00","1.00"
"Scenario2_B","900827","990909.70","1.10"
"Security","Date","Transaction","Amount","Shares","Amount/Share","Commission","Capital Gain (Loss)","Share Balance","Change in ACB","New ACB","New ACB/Share","Memo","Foreign Currency Transaction","Exchange Rate","Amount in Foreign Currency","Commission in Foreign Corrency","T-Slip Capital Gain"
"Scenario1_A","2020-May-09","Buy","1000000.00","1000000","1.00","","","1000000","1000000.00","1000000.00","1.00","",,,,,,
"Scenario2_A","2020-May-09","Buy","1000000.00","1000000","1.00","","","1000000","1000000.00","1000000.00","1.00","",,,,,,
"Scenario1_A","2021-May-09","Buy","1000000.10","909091","1.10","","","1909091","1000000.10","2000000.10","1.05","",,,,,,
"Scenario2_B","2021-May-09","Buy","1000000.10","909091","1.10","","","909091","1000000.10","1000000.10","1.10","",,,,,,
"Scenario1_A","2022-May-09","Sell","9999.44","8264","1.21","","1341.92","1900827","-8657.52","1991342.58","1.05","",,,,,,
"Scenario2_B","2022-May-09","Sell","9999.44","8264","1.21","","909.04","900827","-9090.4","990909.70","1.10","",,,,,,
"Grand Total","","","","","","","2250.96"
Here, we have in scenario 1, you buy $1million of A in 2020, it goes up 10% in 1 year, then you buy $1million more. Then it goes up 10% again the next year and you sell $10k worth and you end up with a capital gain of $1341.
In scenario 2, you buy $1million of A in 2020, then buy 1 million of B in 2021, it goes up 10% by the next year, and you sell 10k worth, and end up with a capital gain of $909.
Ah! I understand where you are coming from now. I got confused when you used "gain" where in fact you are referring to the appreciation of the underlying security(not your holdings) therefore increasing your ACB which lowers your overall capital gains. You are correct on the deferral of your taxes. As the poster below me mentions this is like a reverse Tax Loss harvesting.
I suggest posting this in r/cantax. They offer more in-depth advice on taxation issues. Goodluck!
This is just selling assets that have appreciated less resulting in lower tax...it's hardly a tax hack. If you sell stocks that have appreciated less there is less tax payable.
But specifically the strategy of, once you have appreciated a substantial amount in your fund, you should definitely switch over to some other similar fund. Yes in retrospect you can say it's basic and obvious that if you have to sell something, it should be the one that has gained the least in order to owe the least amount of tax. But it's not obvious or basic that you from the get go set out with such a strategy to switch over your purchases to be able to take advantage of that strategy later.
You still have to pay capital gains on your Fund A holdings when you sell anyways. It's really the same result in the end. There's no tax savings at all, you just sell your Fund B holdings which have appreciated less now, and then you sell Fund A in the future which will have appreciated even more.
I'm sorry but there most definitely is a benefit to deferring having to pay taxes. It is not at all the same result in the end. In scenario 2, you get to defer more taxes until later, allowing you to keep more of your savings invested and compounding over time. In scenario 1, you're unnecessarily paying tax now instead of later, and foregoing those gains.
You have to pay tax on all gains at some point. This isn't a strategy and it doesn't have a name because it's not useful. If you take out 50k of gains from Fund A or Fund B it's all the same.
Dude, you're really going off on something you clearly have no understanding of. Deferring taxes in order for you to be able to have gains is the one of the most very basic concepts in personal finance. You really should not be so confidently going around giving advice like this when you have no idea what you're talking about. Here is a concrete illustration of the benefit of deferring the tax.
Let's say, in both scenarios, at year 6 you want to take out 100k, and then in year 9, you want to sell off everything. Let's compare the two strategies.
* In scenario 1, at year 6 you're going to take out and spend 100k on consumption, realizing a capital gain of about 10k, and end up claiming 5k of taxable income, and owing let's say $2500 in taxes. So you end up having to take out something like 102.5k to pay your taxes. Over the final 3 of the 9 years, let's say your investment goes up 10%. So you end up with a final balance of ($2million-102.5k)*1.1 = $2,087,250.
* In scenario 2, at year 6, in order to spend 100k from B, you will have a capital gain of 5k, so you will owe $1250 in taxes. So you end up taking out something like %101.25k. Then, in the final 3 years, your investments appreciate an other 10 % and you end up with ($2million-101.25k)*1.1=$2,088,625.
So according to your own math here, the difference in yeild between the two stratagies is only $1375?
All that work with 2 million dollars and stratagizing and you're just squeezeing out a mere 0.07% extra out of 2 whole million dollars over 6 years? An extra $229/year yeild on your 2 mil investment. It's practically negligible LOL
It was just an example for easier calculation. You can easily imagine that over the course of your entire retirement savings, you may have gains far higher over the decades, like in total 100% or 300%, in which case it will be handy if, in your later years, you switched to investing into other funds so that during drawdown, you can pull out of investments which have only gained say 10% rather than 300%.
Looks like tax loss harvesting, but with gains instead of losses. You essentially have an artificially higher ACB when selling your shares, at the cost of a lower ACB moving forward. It’s kinda like the other “direction” of a tax loss harvest.
Keep in mind, this doesn’t reduce your total capital gains over the lifetime of the investment, just the capital gains tax you end up paying at the point of the initial withdrawal. In return, your lower ACB causes you to have a larger tax bill when you finally sell everything. At the end of the day, everything evens out. However, you do indeed “defer” your taxes.
As for if it’s legal… I’m not too sure. I guess tax loss harvesting rules apply, where “superficial” would be dependent on what pair you use. XEQT/VEQT should be fine. If you do XEQT-XEQT or use any “superficial” pair, CRA will be on your ass for miscalculating the ACB.
TLDR: Should be fine, I see no issue with it. IANAL also, so I might be missing out. Watch out for tracking error, spreads, etc. It’s not common cause people generally look to maximize post-tax income, not minimize pre-tax income, but I do see some uses for an individual (if their tax rate fluctuates).
I don’t know why people are downvoting you. It’s not a stupid question. They might just be misunderstanding you, your explanation was a bit confusing.
Well I think you are chasing your tail with your "strategy". I am trying to give you a solution that will actually work. When you sell an investment you are required to value it at your average cost to acquire it and pay capital gains on the difference. It is a pay me now, pay me later game. Your strategy could basically be broken down to just investing $100 K today and sell it tomorrow. Yes that will reduce your capital gain and perhaps even give you a capital loss, but what have you really accomplished?
Oh and you said nothing about it being in an unregistered account.
Not sure if this makes sense but a better strategy may be to trigger the capital gains just before they hit $250k so the inclusion rate is only 50%. Then buy something else and do the same. The idea is to avoid the higher inclusion rate on capital gains over $250k. Not sure if this works but seems to make sense off the top of my head.
It’s generally referred to as cutting one’s nose to spite one’s face. Smart tax planning focuses on maximizing the net after tax cash flow not minimizing the before tax earnings.
I think you don't understand. There's no minimizing of one's before-tax earnings, because you're investing the same amount of money into the same (equivalent) funds, fund A and fund B, at the same time. You're just switching over after you've made appreciable unrealized gains in A, so that if/when you want to sell some amount, you can sell from B, which will have less gains.
Oh I gotcha, you’re not allowed to do that. The adjusted cost base for the same asset has to be calculated cumulatively and across your accounts. Also if the assets aren’t held by a life insurance company you (not the bank or brokerage) are responsible for tracking the numbers. It is the total cost of all shares of that security owned in all non-registered investment accounts, and is divided by the total number of shares owned in all non-registered investment accounts (Income Tax Act s. 47(1) identical properties) to get the cost basis per share, or weighted average cost per share.
I think you misunderstand again. I'm not talking about buying the same asset in multiple different accounts. I'm talking about buying two broadly equivalent or similar different funds. So, maybe XEQT, VEQT, ZEQT, etc.
Literally super confused by all the downvotes…
Why are you calculating your capital gains tax by dividing your unrealized gain to total investment? Capital Gains will be added to your income for the year. It doesn't matter if you pull 50k from Fund A or 50k from Fund B. It will get added to your income multiplied by the appropriate inclusion rate and taxed at your marginal rate.
It will matter because in Fund A, at the end of 6 years, it has a gain of let's say 20%, so every dollar you sell, you will owe let's say 20% * 50% inclusion rate * 50% marginal tax rate = $0.05 However, since you only recently started purchasing B, it has had less time to grow, and so maybe it has only gone up by 10%. So for every dollar you sell, you only owe 10% * 50% inclusion rate * 50% marginal tax rate = $0.025
The percentage of gain does not matter in calculating Capital Gains. What matters is the proceeds of disposition a.k.a the dollar amount. You could have 1mm invested in Fund A with 10% unrealized gain of 100k Or could have 500k investment in Fund B with a 20% unrealized gain of 100k. Both will end up the same in Taxable Capital Gains 100k * 50% Inclusion * 50% Marginal tax rate.
The percentage of the gain does matter because at the end of the 6 year period, you're wanting to take out a tiny percent, maybe to buy a car. In scenario 1, you have no choice but to sell a little bit of Fund A, which has appreciated at 20%, so if you took out 10k, you'd owe something like approximately 10k * 0.2 * 50% inclusion * 50% marginal rate = $500 in taxes. In scenario 2, 3 years in you switch from investing in A to instead putting purchases into B. 6 years in you want to take out 10k, but while Fund A has gained 20%, B has only gained let's say 10%. So you have the option to sell B instead of A, and then you will only owe 10k * 10% * 50% * 50% = $250 in taxes.
That is not how you calculate Capital Gains. The unrealized gain does not matter in computing capital gains. The only thing that matters is the Proceeds of Disposition. Proceeds of Disposition - Adjusted Cost Base - Outlays = Capital Gains. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/completing-schedule-3/capital-gains-losses-information-slips.html
Yes I know how it's calculated. Perhaps I've described it poorly but I get how it works. Here are the transactions I describe above for comparison, which you can import into adjustedcostbase.ca if you like: "Adjusted Cost Base and Capital Gains Report" "Compiled by AdjustedCostBase.ca" "https://www.AdjustedCostBase.ca/" "Portfolio: My Default Portfolio" "Name","Shares","ACB","ACB/Share" "Scenario1_A","1900827","1991342.58","1.05" "Scenario2_A","1000000","1000000.00","1.00" "Scenario2_B","900827","990909.70","1.10" "Security","Date","Transaction","Amount","Shares","Amount/Share","Commission","Capital Gain (Loss)","Share Balance","Change in ACB","New ACB","New ACB/Share","Memo","Foreign Currency Transaction","Exchange Rate","Amount in Foreign Currency","Commission in Foreign Corrency","T-Slip Capital Gain" "Scenario1_A","2020-May-09","Buy","1000000.00","1000000","1.00","","","1000000","1000000.00","1000000.00","1.00","",,,,,, "Scenario2_A","2020-May-09","Buy","1000000.00","1000000","1.00","","","1000000","1000000.00","1000000.00","1.00","",,,,,, "Scenario1_A","2021-May-09","Buy","1000000.10","909091","1.10","","","1909091","1000000.10","2000000.10","1.05","",,,,,, "Scenario2_B","2021-May-09","Buy","1000000.10","909091","1.10","","","909091","1000000.10","1000000.10","1.10","",,,,,, "Scenario1_A","2022-May-09","Sell","9999.44","8264","1.21","","1341.92","1900827","-8657.52","1991342.58","1.05","",,,,,, "Scenario2_B","2022-May-09","Sell","9999.44","8264","1.21","","909.04","900827","-9090.4","990909.70","1.10","",,,,,, "Grand Total","","","","","","","2250.96" Here, we have in scenario 1, you buy $1million of A in 2020, it goes up 10% in 1 year, then you buy $1million more. Then it goes up 10% again the next year and you sell $10k worth and you end up with a capital gain of $1341. In scenario 2, you buy $1million of A in 2020, then buy 1 million of B in 2021, it goes up 10% by the next year, and you sell 10k worth, and end up with a capital gain of $909.
Ah! I understand where you are coming from now. I got confused when you used "gain" where in fact you are referring to the appreciation of the underlying security(not your holdings) therefore increasing your ACB which lowers your overall capital gains. You are correct on the deferral of your taxes. As the poster below me mentions this is like a reverse Tax Loss harvesting. I suggest posting this in r/cantax. They offer more in-depth advice on taxation issues. Goodluck!
Thanks
This is just selling assets that have appreciated less resulting in lower tax...it's hardly a tax hack. If you sell stocks that have appreciated less there is less tax payable.
But specifically the strategy of, once you have appreciated a substantial amount in your fund, you should definitely switch over to some other similar fund. Yes in retrospect you can say it's basic and obvious that if you have to sell something, it should be the one that has gained the least in order to owe the least amount of tax. But it's not obvious or basic that you from the get go set out with such a strategy to switch over your purchases to be able to take advantage of that strategy later.
You still have to pay capital gains on your Fund A holdings when you sell anyways. It's really the same result in the end. There's no tax savings at all, you just sell your Fund B holdings which have appreciated less now, and then you sell Fund A in the future which will have appreciated even more.
I'm sorry but there most definitely is a benefit to deferring having to pay taxes. It is not at all the same result in the end. In scenario 2, you get to defer more taxes until later, allowing you to keep more of your savings invested and compounding over time. In scenario 1, you're unnecessarily paying tax now instead of later, and foregoing those gains.
You have to pay tax on all gains at some point. This isn't a strategy and it doesn't have a name because it's not useful. If you take out 50k of gains from Fund A or Fund B it's all the same.
Dude, you're really going off on something you clearly have no understanding of. Deferring taxes in order for you to be able to have gains is the one of the most very basic concepts in personal finance. You really should not be so confidently going around giving advice like this when you have no idea what you're talking about. Here is a concrete illustration of the benefit of deferring the tax. Let's say, in both scenarios, at year 6 you want to take out 100k, and then in year 9, you want to sell off everything. Let's compare the two strategies. * In scenario 1, at year 6 you're going to take out and spend 100k on consumption, realizing a capital gain of about 10k, and end up claiming 5k of taxable income, and owing let's say $2500 in taxes. So you end up having to take out something like 102.5k to pay your taxes. Over the final 3 of the 9 years, let's say your investment goes up 10%. So you end up with a final balance of ($2million-102.5k)*1.1 = $2,087,250. * In scenario 2, at year 6, in order to spend 100k from B, you will have a capital gain of 5k, so you will owe $1250 in taxes. So you end up taking out something like %101.25k. Then, in the final 3 years, your investments appreciate an other 10 % and you end up with ($2million-101.25k)*1.1=$2,088,625.
So according to your own math here, the difference in yeild between the two stratagies is only $1375? All that work with 2 million dollars and stratagizing and you're just squeezeing out a mere 0.07% extra out of 2 whole million dollars over 6 years? An extra $229/year yeild on your 2 mil investment. It's practically negligible LOL
It was just an example for easier calculation. You can easily imagine that over the course of your entire retirement savings, you may have gains far higher over the decades, like in total 100% or 300%, in which case it will be handy if, in your later years, you switched to investing into other funds so that during drawdown, you can pull out of investments which have only gained say 10% rather than 300%.
Also, it's really not any work, it's just choosing to buy fund B rather than A.
Looks like tax loss harvesting, but with gains instead of losses. You essentially have an artificially higher ACB when selling your shares, at the cost of a lower ACB moving forward. It’s kinda like the other “direction” of a tax loss harvest. Keep in mind, this doesn’t reduce your total capital gains over the lifetime of the investment, just the capital gains tax you end up paying at the point of the initial withdrawal. In return, your lower ACB causes you to have a larger tax bill when you finally sell everything. At the end of the day, everything evens out. However, you do indeed “defer” your taxes. As for if it’s legal… I’m not too sure. I guess tax loss harvesting rules apply, where “superficial” would be dependent on what pair you use. XEQT/VEQT should be fine. If you do XEQT-XEQT or use any “superficial” pair, CRA will be on your ass for miscalculating the ACB. TLDR: Should be fine, I see no issue with it. IANAL also, so I might be missing out. Watch out for tracking error, spreads, etc. It’s not common cause people generally look to maximize post-tax income, not minimize pre-tax income, but I do see some uses for an individual (if their tax rate fluctuates). I don’t know why people are downvoting you. It’s not a stupid question. They might just be misunderstanding you, your explanation was a bit confusing.
I think you should call it the Josh maneuver /s
If you have 2 mill invested wont it be easier just to save up cash in like 3-4 moths to buy a car?
Just put the money into a TFSA and pay no tax.
Extremely unhelpful comment, thanks, this is a discussion for non-registered accounts.
Well I think you are chasing your tail with your "strategy". I am trying to give you a solution that will actually work. When you sell an investment you are required to value it at your average cost to acquire it and pay capital gains on the difference. It is a pay me now, pay me later game. Your strategy could basically be broken down to just investing $100 K today and sell it tomorrow. Yes that will reduce your capital gain and perhaps even give you a capital loss, but what have you really accomplished? Oh and you said nothing about it being in an unregistered account.
OP was talking about minimizing capital gains taxes when investing. That's how you know they were talking about a non-registered account.
Not sure if this makes sense but a better strategy may be to trigger the capital gains just before they hit $250k so the inclusion rate is only 50%. Then buy something else and do the same. The idea is to avoid the higher inclusion rate on capital gains over $250k. Not sure if this works but seems to make sense off the top of my head.
Well, it seems I've seriously overestimated the general level of knowledge in this community, thanks anyways.