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Stocks, spreads and the 10-day moving average

Try these five tax tips to save money on your 2012 tax bill. 
Then read Andy Sirski’s stock update

Lots has gone on during the first two months of 2013. First, I want to mention just a few tax tips that you or your family might be able to use.

Five tax tips

1. Moving expenses: If you move to take on a new job, remember to keep records.

When you move to a job that is more than 40 kilometres away, you and your family can claim mileage (the rate is around 49 cents a kilometre and changes from province to province). You’ll need to document your old and the new address.

You can also claim $17 per meal up to $51 per day from the day you leave the old address for a reasonable travel time, plus 14 days of meals at the new address. If you travel by plane, bus or train you can claim the actual cost, plus cab fare.

Along the way, if you stay at a hotel or motel, you can claim the cost of overnight stays but you’ll need receipts. If you need to stay in a hotel temporarily at your new place, you can claim the cost of hotels with receipts for two weeks and meals at $51 per day.

Some miscellaneous costs might be allowed (like phone calls), but they’ll need to be reasonable and documented. If you stay overnight with friends, you can still claim $17 per meal.

Of course if the new employer pays travel costs, no tax claims are allowed.

2. Medical trips: If you, your spouse, or your child needs to travel for medical care, keep track of the mileage. The Canadian Revenue Agencay (CRA) is getting a little stickier than they used to be and might disallow a medical trip if you drive past a local doctor to go to your favourite doctor. If long distance travel is needed to see a specialist CRA might need a letter to explain why you drove past a local doctor.

If you travel more than 40 kilometres each way, you can claim transportation costs. If you travel more than 80 km each way to get to the appointment, you can also claim accommodation, meals and parking expenses. Again the cost of $17 per meal up to three meals a day is usually allowed without receipts. Most of the time expenses can also be claimed for a travel companion.

Generally, trips to see chiropractors, eye specialists, specialists and physiotherapists are allowed as medical trips.

If you buy private medical insurance the premiums are tax deductible as farm expenses. If you aren’t faming those costs can be added to your total medical costs, but you will need to deduct three per cent of your net income before you claim the medical cost.

Of course your costs of pills, glasses and dental bills are usually eligible medical expenses.

3. Inventory provision: Most cattle producers have faced some tough years since 2003. If you were one of them and you and your farm lost money, I hope your accountant set up an inventory provision that brought in paper income to cover all farm losses including full capital cost allowance.

If farming was your only source of income then the income from the inventory provision can be raised to cover your personal exemption and your spouse’s exemption if that fits too.

I’ve been writing about the inventory provision since about 1980, maybe earlier, and I’m amazed that some tax preparers still don’t use this handy way of offsetting farm losses. It is a clean way to carry forward losses into the future, so they can be used to offset future income.

If your accountant has not carried an inventory provision number to cover your farm losses, think about amending past returns to put the inventory provision on record. This might take some thinking and some work, but it might be worth your time.

4. Split farm sale: Most of the time it pays to split farm income over two or three years if you’re selling a farm and related items. One little known tax tip goes as follows if you sell out a herd. If you do the sale through a registered auction business, you can set up a promissory note with the auction house for at least part of the income from selling the herd and have the promissory note mature five or six months into the next year.

If you sell to a farmer, most of the time that split is not possible, unless you actually don’t get paid for the cattle in the year you sold out. That split on the cash basis takes a bit of negotiation and trust ahead of time.

It often pays to sell cattle and grain in one year and machinery in another so any recaptured capital cost allowance goes into the next year.

Of course most farmland carries a capital gains exception so the gains on the farm might be tax free. But you might lose your supplement income in the year you sell the farm. If the capital gain is high enough, you might have your old age pension clawed back, even though you don’t actually pay other income tax on the gains.

5. Incorporation: If your farm is large enough, it might pay to incorporate a couple of years before you retire. Farm income will be taxed at a low corporate rate, and your company can pay you a salary and or dividends in the years ahead.

Stock update:

First Majestic (FR:TSE)

Since January 2012 I’ve been working with a few thousand shares of FR. They cost around $18. I sold calls for July for around $2.40, paid 35 cents to buy them back, sold calls for $1.60 for October, paid $3 to buy them back and then sold a call for April for $4.50 and paid 90 cents to $1.05 to buy them back. That was all at a strike price of $18.

Those numbers add up to just over $5. The shares ranged from about $14 to $23, but most investors would likely sell closer to $14 because they find it hard to sell near tops. As you can see I got $5 in cash in my account and the shares are down 50 cents from my cost one year ago.

The shares dropped this past week for two reasons. One is that the price of silver dipped below $30 and ounce. But this is likely the bigger reason share prices dropped:

Back in December 2012 FR put in an offer to buy Orko Silver Corp. (OK:TSX Venture), for shares. The deal would have diluted future earnings and could have set a precedent for future deals. Then along came Coeur D’Alene Mines Corporation (CDE:NYSE) with a richer offer, but according to the agreement signed by FR and OK, FR had five business days to amend its original offer.

FR decided not to raise its bid. FR will collect a breakup fee of $11.6 million from OK and the market seemed to like this. In afterhours trading on February 19, FR was up 76 cents or 4.4 per cent.

I have a few thousand shares of FR with no calls on them. Now it will be time to see if I can collect another two bucks or so from the next covered call, bringing my total cash income to $7 or so on an $18 stock in a year and a half.

10-day moving average (10 dma)

The month of February can often be mean to some shareholders. This year it looks like February is picking on resource stocks.

Why can February be a bad month for some stocks? If shares have gone up a lot in the two or three months before, they might be ready for a bit of a downturn. Also, China takes a week off to celebrate the Chinese New Year. Markets are closed and minds and traders are thinking of celebrating, not stocks.

This year, the U.S. dollar went up because the Euro was getting pricy. This helped to drop the price of gold in U.S. dollars.

In the past, I’ve written about how it often pays to sell when stock prices go below the 10-day moving average. Let’s look at how prices moved through the 10 dma average for some of my commodities and stocks.

The pattern I’ve seen goes as follows: shares are in season, the price goes up significantly and then some catalyst causes price to flatten.

Many investors start selling when the price stops going up — it doesn’t take long for the daily price to cross the 10 dma going down, and the drop starts feeding on itself.

Gold ($gold on Stockcharts.com) dropped through the 10 dma in early October at around $1,780 and has used its 10 dma mostly as a ceiling ever since. The price was under $1,600 for a short time on Friday, February 15, and then had a long tail under the candlestick which might end up bullish. Still the price is down almost $200 an ounce since the price dropped through the 10 dma.

Silver ($silver on Stockcharts.com) dropped through the 10 dma at $34.50 about the same time as gold. It has gone down more than up ever since — the price is under $30 as I write on February 16.

Will these prices stay down? I don’t think.

If I had looked closely I could have sold those calls for days on end at with an $18 strike price for $2.30. Now I could buy them back for 90 cents less. That would have added to my overall gains on selling calls.

The tough part about selling as the price drops through the 10 dma is to believe the price will drop more.

Thompson Creek Metals (TCM): I had 7,000 shares of TCM at cost of $3, and 5,000 shares of naked puts that we sold for $1.10. The shares crossed the 10 dma going down at around $4.20. I sold the shares and bought back the puts for 31 cents; I did well.

I recently bought 3,000 shares of TCM at just over $4 and sold calls for July with a strike price of $4 — collecting 58 cents per share or 14 per cent for half a year.

Bombardier (BBD.B): is piling up orders for its new regional jet, but needed money last fall to pay for parts and labor. The company wanted to float a loan and the risk was that money would be hard to come by or expensive. Shares dropped to under $3.50.

As things turned out, Bombardier was able to borrow twice what it actually wanted to borrow at a very nice rate so shares went to $4 very quickly.

I bought 1,000 shares at just around $4 and will likely buy more. Calls for July with a strike price of $4 are paying around eight per cent for five months, and the dividend pays 2.5 per cent per year. I can make this work.

Sherritt (S): has been slipping from its high of $6.20. My cost is $5.63 — the price has touched down to that level three or four times over the last few months, this could be a floor.

Estimated earnings don’t look so great, but it’s a nickel mine in Madagascar that started up last fall, which should improve cash flow and earnings.

The shares pay a dividend of just over 2.5 per cent, and I could sell calls for July with a strike price of $6 and collect 25 cents per share. This would be 4.4 per cent on my cost and almost double the dividend. Sherritt has a very informative website at www.sherritt.com.

Yamana Gold (YRI): was a favourite a few years ago when shares were $11 to $12 and selling calls paid for a lot of holiday trips to football games in Eastern Canada while my son Nick played for the Golden Gayles in Kingston, Ont.

These shares have traded as high as $20.50 and now trade at just over $15. The call for a strike price of $15 for January, 2014 is paying around $2 or $1.74 net — that’s 11 per cent for 10 months. The company has the gold, decent cost of mining and gets nice reviews on BNN. I don’t own this stock, but it is tempting.

On the afternoon of March 6, I will hold a free hands-on workshop in Steinbach, Man. Call 1-204-268-6094 to pre-register. †

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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