As you know, this has been a great year and a poor year for farmers, depending on where you farm. Depending on your situation, there are different tax liabilities to manage. But let’s start with the good stuff.
Money made with stocks in a trading account is taxable but how taxable depends on how you made the money. Interest income is taxed at full value in the year we receive it. If the interest is accumulating, you have to allocate the interest earned for 2010 and declare that as income. There likely will not be a T-5 issued if you own a three-or five-year bond or GIC so you will have to figure out the actual interest per year. If your account did not earn more than $50 the broker will not send a T-5 to you.
Capital gain includes money made from selling stocks for more than you paid for them and half of that is taxable. I sell covered calls and in my trading account the premiums (money) I collect are also capital gain on the cash basis, and so taxed in the year we collect the money.
Dividends are taxed at a preferential rate and you get the numbers off the T-5 the company will send to you.
Now let’s chat a bit about how to declare the income from a trading account. Again, interest is taxed as income, and if money in the account earned some interest your broker should send you a T-5 if you made more than $50. If your shares earned dividends the broker will send a T-5 to you.
Capital gain gets a little more complicated. I have heard of three ways to figure the capital gain in a trading account. Our broker sends us a paper copy, but on December 1, 2010, I printed off transactions from January 1, 2010 and got a head start on figuring out my gains and losses. Our broker includes commissions in the cost price and deducts the commission on the sale value.
First I add up the value of all the stocks and covered calls I sold on the stocks I bought and sold in 2010. This is quite straightforward. Next I add up the value of the stocks I sold in 2010 but had bought before 2010. I add the cost of the stocks bought in 2009 (or earlier) to those sold in 2010. Finally I make sure I take out the cost of shares we bought in 2010 and did not sell in 2010. It sounds a bit complicated, but it’s not very difficult.
On Schedule 3 I enter two numbers: cost of shares and sale of shares and the difference is either a capital gain or loss. If it is a gain my tax program will look back to check if I have losses carried forward. If I do it will deduct losses carried forward and then cut any gains in half and put that amount on Line 127 on Page 1 of the jacket of the personal tax return. If there is a loss our software will leave line 127 blank and carry the loss forward.
One reader I know says his broker wants every transaction recorded. But then another one told me the other day his accounting firm just wants the value of the account at the beginning of the year and at the end. I think this means a person might end up over paying or underpaying taxes in any one year but maybe it will come out in the end.
I now record the value of the account at the end of each year and that is the starting point for next year in case I ever switch to that system. I do feel more comfortable figuring out the actual capital gain I triggered year by year. but in the end go by what your tax preparer wants to work with.
If you have losses in 2010 but gains in 2007, 2008 and/or 2009 you can carry those losses from 2010 back up to three years. Start with gains in 2007 and reduce them. If you still have losses use them to reduce gains in 2008 and so on.
Losses carried forward do not get dropped off so you can carry them for as long as you need to.
OTHER CAPITAL LOSSES
I know people who invested with other companies that have gone belly up and they never had a chance to sell their shares even for a penny. Somehow you need to get witness or verification that the shares are useless. I didn’t have any of those lately but one person I know had bought into some pie maker and lost his $25,000. We emailed the seller of those shares and he emailed back saying the shares were dead and we will use that as testimony if CRA ever asks. Another example would be if you had Nortel shares that cost you $80 and you never got around to selling them and now they are worthless.
I guess if I had those kinds of losses I would document the numbers and send them in to CRA. But they might just put those losses on your records and your Notice of Assessment should show that loss in years to come.
What are flow throughs? This is a system set up maybe 20 years ago where an investor can work with a broker to lend money to a resource company. We buy units in that flow through that really are used to buy shares in what is usually a small cap resource company. There is a risk of loss, it should be noted. The company uses that money to explore for or develop a mine or oil well and so on and the governments allow the company to flow that cost back to our personal tax return. This strategy works better in high tax havens like Manitoba and Quebec.
At the top end, a flow through can save us about 50 per cent tax. When I buy a flow through for $10,000, I put that number on line 224 of my personal return and save $5,000 of tax. Anyone in the middle tax bracket would normally save around $350 of tax per thousand.
Most flow throughs mature in 18 months or less and these days many outfits try to mature them within a year. Some one-stock flow throughs mature in four months.
Since we write off the full cost of the flow through our adjusted cost base drops to zero. Hence when the flow through matures and is paid out, the money received is classed as capital gain (so half taxable). Anyone who has tax losses carried forward from say Nortel or Sask Pool (see sidebar) could buy a flow through. It reduces tax on all and every kind of income and coverts it into taxable capital gain at the half rate. You then use the losses carried forward to offset the taxable capital gain and over time recover at least some of those losses.
Readers of my newsletter StocksTalk get my essay on Flow Throughs free, and sinceGrainews readers are so nice too, I will offer the same to you, plus a free month of StocksTalk. Just send an email to me at [email protected] and I will send by return email.
OTHER TAX TIPS
If you have growing children you can pay them wages for work they do on your farm or other business. Keep the wages more or less according to the child’s age but don’t be too stingy. A teenager for example likely can earn up to the personal exemption number of around $10,300 and pay no income tax but would have to pay into CPP at tax time unless you do the formal paperwork during the year.
You can also pay a child with what is called income-in-kind. These are things like calves, cows, pigs or grain and so on. Just be sure to document the transactions.
Paying children is the perfect tax strategy. Your farm or business
gets to claim the full expense while the child might pay no tax on that money. And then the child can spend his or her own money on stuff they buy or save it for future education.
If your farm is not set up as a partnership you can pay your wife wages for work done. I like to see new farmers set up a partnership between husband and wife and then they don’t have to pay wages.
The wages will lower or eliminate your wife’s personal exemption so this is not as rich a strategy
as paying children, however most wives are around longer than most children so paying a spouse is one way to move some income perhaps from a high tax payer to a lower tax payer and gives the spouse a chance to pay into an RRSP or a Tax Free Savings Account.
These days I think we have written about farm income and expenses so much that most people know all the ins and outs, however a couple things deserve a word.
1) The cost of owning a farm dog can be called a security expense and cat costs can be rodent control. Sorry that cutie that sleeps on your bed or couch might not qualify.
2) The cost of going to farm meetings should be totally deductible. In some cases maybe use only 80% of the cost as an expense (such as in cases where you did some visiting along the way, perhaps).
3) If you travel more than 25 miles for medical care usually you can claim the cost of mileage at somewhere around 50 cents a kilometer, plus meal costs of up to $17 per meal ($51 per day) can also be claimed without receipts. Hotel costs need receipts.
4) The total medical costs are entered on line 330 of your personal return and three per cent of net income from line 236 (up to a limit) is deducted and the rest becomes part of your tax credit system.
5) If you move for a job the cost of travel is a deductible expense. As an example, if your kid is away at college and comes home to a job those travel costs are deductible.
If you have a farm loss be sure to at least check out using the inventory provision which brings in paper income for 2010 and that amount becomes an expense going forward. This is a much neater strategy than carrying non-capital costs forward on your return.
You can also pay a child with what is called income-in-kind. These are things like calves, cows, pigs or grain and so on. Just be sure to document the transactions