The Capital Gains Blog

Posts Tagged ‘etf’

Question: How to ensure “capital” tax (instead of income) treatment for investment gains?

I have a full-time job unrelated to the securities industry and I use a discount broker to manage my investments and would like to benefit from lower Capital Gains Tax rates for my investment profits.

My goal is to hold about 50-70 securities (ETFs, equities) in my portfolio at any given time and I anticipate holding each security for at least 6 months before disposing/selling it. I’d like to add to my positions gradually via dollar-cost averaging and use covered calls to reduce the cost basis. My intent would be to execute about 10-20 buy transactions per month (often I’d be adding to existing positions) and perhaps about 5 sell transactions per month. Would using such a strategy put me at any risk for being flagged an active trader and subject to having gains taxed as income instead of the more favorable capital gains (w/ 50% inclusion) rate?

Furthermore, does the use of 15-20% margin significantly affect one’s susceptibility to being flagged as an active trader?

Answer: My understanding is that you will be considered an investor at those levels. I hold more than that number of securities and have not been considered a trader. 5 sales per month sounds like nothing out of the ordinary.

In any case, consult this Interpretation Bulletin document:

http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.txt

Some relevant texts:
“11. Some of the factors to be considered in ascertaining whether the taxpayer’s course of conduct indicates the carrying on of a business are as follows:
(a) frequency of transactions – a history of extensive buying and selling of securities or of a quick turnover of properties,
(b) period of ownership – securities are usually owned only for a short period of time,
(c) knowledge of securities markets – the taxpayer has some knowledge of or experience in the securities markets,
(d) security transactions form a part of a taxpayer’s ordinary business,
(e) time spent – a substantial part of the taxpayer’s time is spent studying the securities markets and investigating potential purchases,
(f) financing – security purchases are financed primarily on margin or by some other form of debt,
(g) advertising – the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
(h) in the case of shares, their nature – normally speculative in nature or of a non-dividend type.

12. Although none of the individual factors in 11 above may be sufficient to characterize the activities of a taxpayer as a business, the combination of a number of those factors may well be sufficient for that purpose.”

Do note that in theory one can be considered a business even if your job is in an unrelated field. It depends on the “nature of trade”:

http://www.cra-arc.gc.ca/E/pub/tp/it459/it459-80e.txt

As you can see there is some room for interpretation but I think you will be fine as long as you don’t start daytrading.

P.S. to other posters: this is a Canadian tax issue, not a US one.

Too Much Focus On Tax Consequences May Lead To Overlooking Asset Growth: Portfolio Manager Sees Growth Of Capital As …

67 WALL STREET, New York – January 4, 2010 – The Wall Street Transcript has just published its GARP And Other Investing Strategies Report offering a timely review of the sector to serious investors and industry executives. This 59 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available …

ETF

Question: Are dividends and capital gains paid by the share or by the amount invested?

Assume I have $1500 to invest, will my dividend be more if I buy 20 shares of an ETF that costs $75 instead of buying 10 shares of an ETF costing $150 assuming the dividend rate is the same?

Thanks
Open4one
Thanks. I am really looking at ETFs and mutual funds and not individual stocks. I dont really have the dough to be gambling, period!

Answer: It is paid by the share. So… if the dividend is the same… go with the cheaper one.. better return.

Security Global Investors Intensifies Alternative Investments Focus With Two New Hires

Jerome Abernathy, Ph.D. Joins SGI’s Quantitative Investment Team as Director of Research, and David Beeman Assumes Senior Product Manager Role for the Firm’s Alternative Investments Suite, Including Rydex|SGI Mutual Funds

Question: Do you have to pay capital gains on an ETF even if you don’t sell it?

For example, let’s say that the ETF consists of a hundred stocks. If the fund manager sells a couple stocks in the ETF, do you have to pay capital gains even if you did not sell any shares of the ETF itself?

Answer: An ETF is pretty much just like your basic shares of a stock.

Capital gains aren’t “realized” (read : taxable) until you sell the shares in the ETF.

Luukko: ETFs gain ground on traditional funds

Cheap and simple. That was the original concept behind exchange-traded funds in Canada when the first ETF, tracking 35 domestic blue-chip stocks, was launched in 1990.

Question: Which schedule of ITR-2 to use for showing Long Term Capital Gains from sale of Gold ETF?

I sold some Gold ETF after holding it over a year. This was traded on the stock exchange but no STT was charged, so it will be long term capital gains. I want to claim at rate of 10% without indexation. I want to know whether to fill in schedule CG (section 112(1) applicable) of ITR2 or should I fill in schedule SI i.e. tax at special rates?

Answer: It is not Long Term Capital Gains. (Not shares). It is short term capital gains and the entire gains are added to your regular income and you have to pay tax as per slab rates.

No question of 10% or 20%.

You have to fill Short-term (others) (A6 of Schedule CG)

Goldbugs and Jitterbugs

Does gold provide retirement security?

MrGoldInvestor’s Gold on Record High as India May Buy more gold from IMF

Question: Forward declaration of capital gain?

Hi,

I am currently a student and my taxable income is less than my personal deduction. I have about 6000$ left of non-refundable tax deduction and I have money invested in mutual funds. I plan to be making a lot more money in a two years and I will eventually have to pay income tax.

I have a few mutual funds and ETFs I wanted to know if I can declare a capital gain on them in order to take advantage of my non-refundable tax credits? If so, can I use any price I could have sold them during the year or do I have to actually sell them and buy them back? I wanted to know as well if I can declare capital gain on other assets than actions, real estates or funds.

Thanks a lot and have a nice day.

Maxime

Answer: You generally have to sell the mutual funds or assets to realise a capital gain (or loss).

You can buy them back later if you wish. However, there is a “superficial loss” rule in the cdn income tax act whereby, if you sell a property at a loss and you buy the property back within 30 days, the loss is denied, but added to the adjusted cost base of the property (basically back to square one).

In the cdn income tax act, there could also be deemed disposition or sale without selling your property to an arm’s length party. A deemed dispostion at fair market value would occur when one dies, one leaves the country, change in use of the property (from personal use to business use, and vice versa), etc., but it appears none would apply to you.

Pullback Buy Entry into iShares Japan (EWJ)

We’ve mentioned EWJ a few times over the past month, as the ETF has started to show relative strength. Here’s a recap of our trade entry into this international fund.