Capital Gains Taxes and their Remedies

keep calm and carry (more) on


 

The taxes on investment are numerous and pervasive. We are taxed on our interest income, on our dividend income from corporate shares we may own, on loans from our corporations, on gains in value of most of our assets and on the income on most financial products we buy.

The remedies for these taxes are numerous and sometimes complicated. However they can boiled down to a few very simple approaches. These taxes can be remedied, either by shifting the time they are realized, shifting the earning to a more tax favoured entity.

Many investments allow a deduction for the cost of the investment in the year in which the asset is acquired, thereby providing tax deferred returns. These deductions are typically recovered on the sale of the asset by the investor taxpayer. While only a portion of the asset cost can be deducted, often the asset can be financed allowing the net investment return to be fully tax deferred. This also gives rise to many taxpayers or investors with assets accumulated with large negative tax cost, that is to say their tax cost or basis in the asset is far below the market value and in some cases the debt outstanding against the asset. A number of investment bankers specialize in the purchase and sale of such assets, as typically sellers have low tax cost and buyers wish to buy at high cost. Real Estate Investment Trusts flow through their deductions, often providing a large portion of their income free of tax, and lowering the tax cost of the investment below its cash cost.

One remedy for tax on investment and indeed other income is the “house shuffle” . Utilizing this strategy, the principal residence exemption can be utilized to defer business tax.

Replacing debt that is non-deductible with debt that is deductible, provided you have taxable assets to finance, is a no-brainer