TRAPS IN REALIZING LOSSES FROM INVESTMENTS

Selling investments with unrealized losses makes sense if you can offset the losses against gains. Capital losses are available to offset gains from other investments in the current year, three prior years or any future year.  The same rules apply to non-capital losses except for limiting future years' claims to twenty succeeding years.

There are some traps for the unwary.  Losses are denied in the following circumstances:

• Transfers or sales of assets to a corporation  controlled by  you;
• Transfers or sales of assets to your RRSP;
• Repurchase of the asset within 30 days of sale (known as a  'superficial' loss).         

PAY THE MINIMUM TAX INSTALLMENT

The next  quarterly personal tax installment is due June 15. CRA mails reminder notices but they are just that -  reminders.  CRA have no means to enforce payment.

Each installment is 1/4 of your installment base, which for most people, is the lesser of 2011 and 2010 taxes.  If you pay less than the required installment then CRA charges interest on the underpayment - but only after the 2011 tax return is filed and assessed.

Paying based on estimates is best if you can predict your 2011 taxes. The more your income varies, the more difficult it is to estimate your tax liability.  This is a particular problem if you generate income near the end of the year.  You may be assuming a lower income until that point, and then you receive unexpected income (such as a capital gain).  The installment base for 2011 is suddenly higher than you expected - and you cannot go back to earlier months to correct the deficiency.  The only option that you have is to significantly overpay your taxes and produce a credit to offset the interest charges.  

CRA automatically charges interest on deficient installments. There is no way (other than overpaying subsequent installments) to reduce the charge.  The interest will appear on the 2011 Notice of Assessment.  The rate of interest is currently 5% compounded daily but is subject to change every three months.  An additional penalty of 50% of the interest (i.e.  a 7.5%% annual rate) is assessed if the interest payable is  more than $1,000 of interest per year.

If 2011 is the first year you triggered the installment requirement you may not need to pay them - even though the Income Tax Act says you do.  CRA has a policy to allow one year of grace. The grace period applies only to the first year the requirement is met.

To complicate matters further, CRA have their own system of automatic reminders. These reminders are not a requirement to pay - just a reminder.  If you pay according to CRA requests, no installment interest is payable. The problem lies when your income changes from year to year.  CRA requests are based on prior year income with some lag due to the time it takes to process past returns. If your income changes during the year consult our office and we will be glad to go over things with you to ensure that you pay the right amount towards your installments.

              CLOSER CONNECTIONS STATEMENT  

If you are a deemed U.S. resident for 2010 you must file a personal tax return, or a Closer Connection Statement by June 15, 2011.  A Closer Connection Statement allows a Canadian resident to file Canadian returns only.

You are a deemed U.S. resident if you meet the substantial presence test.  This test is based on time spent in the U.S. (regardless of the purpose) as follows:  

1. You were physically present in the U.S. for 31 or more days in 2010, and
2. You were physically present in the U.S. for 183 or more days using this formula:

 i.  100% of days spent in U.S. in 2010 plus

ii.  1/3 of days spent in U.S. in 2009 plus

              iii.  1/6 of days spent in U.S. in 2008.

IMPORTANT UPCOMING DATES