You might have heard of the Darwin Awards. The awards, created by author Wendy Northcutt, are given to people who die in such an idiotic manner that their action ensures the long-term survival of the species, by selectively allowing one less idiot to survive. Maybe not surprisingly, a study a few years ago showed that 88.7 per cent of people receiving a Darwin Award are men.
This doesn’t surprise my wife in the least. Last weekend she got angry at me for breaking a window at our home when I decided to install some Christmas lights by stacking two ladders on top of each other to reach above our kitchen window. I told her I’d make it up to her. I’m going to put some money in her pocket through some clever tax planning. “No need to thank me,” I said to her. Here’s the idea I’ve got in mind.
The Concept
Suppose you have an investment in your portfolio that has declined in value. You still own it, so you have an unrealized capital loss. You could take advantage of this loss by selling the investment and then applying the capital loss against capital gains. Our tax law will only allow use of those capital losses by applying them against capital gains – not other income.
Now, suppose you don’t have capital gains to offset the capital losses. But let’s assume your spouse has capital gains. There’s a way to transfer those capital losses to your spouse so that they can offset the gains. This can allow your spouse to save tax on the capital gains and could even allow your spouse to recover taxes that might have been paid in one of the past three years.
The story
I first used this idea many years ago when a gentleman, named Peter, came to me with a problem. He had purchased shares in Bre-X Minerals Ltd., the former gold mining company – and so had his wife, Wendy. As it turns out, Wendy had sold her Bre-X Minerals Ltd. shares for a profit of $400,000. She was smart and exited her position before it was discovered that the company’s gold resource at Busang, Indonesia, was a massive fraud.
Unfortunately, Peter kept his Bre-X Minerals Ltd. shares too long and ended up losing about $400,000 of his money. But he couldn’t use the capital losses because he had no capital gains. He came to me looking for a way to apply his losses against Wendy’s gains. We were able to help by outlining three steps to take to transfer his capital losses to Wendy for her to use.
Step 1: Peter sold his Bre-X Minerals Ltd. shares on the open market. At the time, the shares were still trading, so he was able to sell the shares for $10,000 and realized a $400,000 capital loss in the process. But since he couldn’t use the losses, we didn’t stop there.
Step 2: Wendy then purchased the same number of Bre-X Minerals Ltd. shares on the open market as Peter had just sold, for the same price of $10,000. When Wendy purchased the shares, the superficial loss rules kicked in and denied Peter the ability to use his $400,000 capital loss. Those rules say that when you sell a security at a loss, and then you, or someone affiliated with you (like your spouse), purchases the same security within a time frame that is 30 days before or after the sale, then your loss will be denied.
So, Peter’s capital loss was denied. But it didn’t disappear forever. Our tax law will cause the loss that is denied to be added to the adjusted cost base (ACB) of the newly acquired securities. The reason? So that the eventual sale of the newly acquired securities will give rise to a smaller capital gain or a larger capital loss. So, the $400,000 loss denied to Peter was added to Wendy’s $10,000 cost amount, resulting in a total ACB for her of $410,000.
Step 3: Wendy then sold her Bre-X Minerals Ltd. shares for their true value of $10,000. In this case, the stock had ceased trading, so she sold her shares to an adult family member (not Peter) by drafting up a simple purchase and sale agreement. If Bre-X Minerals Ltd. had still been trading, she could have simply sold the shares on the open market.
The nuances
The timing of these steps matters. Step 1 (the initial sale) starts a 30-day clock ticking. Step 2 (the repurchase) must take place before the 30th day after Step 1. That means the “superficial loss” rules kicks in, which would deny Peter’s losses and will enable the loss to be transferred to Wendy. Then, Step 3 (the second sale, which is made by Wendy) must take place after the 30th day following Step 1. If you don’t respect this timing, the superficial loss rules may not apply. In this event, Peter in our story may have had the capital loss without it transferring to Wendy. Finally, initiate Step 1 before Nov. 25, 2023, to make sure that Step 3 takes place in 2023 if you like this idea and want to have the capital loss available this year.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
